SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 1-155
First Medical Group, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1920670
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1055 WASHINGTON BOULEVARD, STAMFORD, CT 06901
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (203) 327-0900
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock $.001 par value OTC - Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES X NO
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Approximate aggregate market value of the voting stock held by "nonaffiliates"
of the Registrant on March 18, 1998: $2,161,236.
Number of shares of Common Stock outstanding of the Registrant as of March 18,
1998: 9,397,292.
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* Registrant's sole class of voting stock is its Common Stock $.001 par value,
which is listed on the OTC-Bulletin Board. The determination of market value of
such Common Stock has been based solely on the closing price per share of such
stock on the OTC-Bulletin Board on the date indicated. In making this
computation, all shares known to be owned by directors and executive officers of
the Registrant and all shares known to be owned by person holding in excess of
5% of the Registrant's Common Stock have been deemed held by "affiliates" of the
Registrant. Nothing herein shall affect the right of the Registrant to deny that
any such directors, executive officers or more than 5% stockholder is an
"affiliate."
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PART I
ITEM 1. BUSINESS
GENERAL
THE COMPANY
RECENT EVENTS
The Company entered into an agreement on April 8, 1998 for the sale of
nine medical facilities and a Medical Service Organization ("MSO") that it
manages which are located in Florida. The facilities are being sold to a
publicly held company for a total consideration of $6,750,000. The agreement was
closed on April 14, 1998. The proceeds from the sale will be used to pay down
the Company's existing debt as well as to provide working capital for
operations.
The Company also entered into an agreement to sell its HallMark
division for a total of $1,900,000 of which $750,000 will be paid in cash and
the balance will be the assumption of debt.
On July 9, 1997, First Medical Corporation ("FMC") merged with a
wholly owned subsidiary of the Company (the "Merger"). As a result of such
merger, FMC became a wholly owned subsidiary of the Company.
See "Business - Merger with FMC."
The Company, through its wholly owned subsidiary, HallMark Electrical
Supplies Corp. ("HallMark"), is engaged in the distribution of electrical
supplies for the construction industry (in the New York Metropolitan area).
See "Business - Lehigh."
FMC is an owner-manager and provider of management and consulting
services to physicians, hospitals and other health care delivery organizations
and facilities. FMC's diversified operations are currently conducted through two
divisions: (i) a physician practice management division which provides physician
management services including the operation of clinical facilities and
management services to medical service organizations and (ii) an international
division which currently manages western style medical centers in Eastern Europe
and the Commonwealth of Independent States (formerly Russia) (the "CIS). See
"Business - FMC." The combined company is currently continuing both lines of
business at this time.
Unless the context otherwise indicates, the "Company" or "FMG" as used
herein means First Medical Group Inc. and its wholly-owned subsidiaries, FMC and
HallMark and their subsidiaries, "Lehigh" means the Company before the Merger
and the Company other than its wholly-owned subsidiary FMC and its subsidiaries
after the Merger and "FMC" means First Medical Corporation and its subsidiaries.
The Company's executive offices are located at 1055 Washington Blvd.
Stamford, CT 06901, and its telephone number is (203) 327-0900.
MERGER WITH FMC
On July 9, 1997 at a Special Meeting (the "July Meeting") of
stockholders of the Company, the stockholders of the Company approved the Merger
pursuant to the terms of the Agreement and Plan of Merger dated as of October
29, 1996, as amended (the "Merger Agreement") among the Company, First Medical
Corporation ("FMC") and Lehigh Management Corp., a wholly-owned subsidiary of
the Company ("Merger Sub"). On the same day, Merger Sub was merged with and into
FMC and each outstanding share of common stock of FMC (the "FMC Common Stock"),
was exchanged for (i) 1,127.675 shares of the Company's Common Stock, par value
$.001 per share ("Common Stock"), and (ii) 103.7461 shares of the Company's
Series A Convertible Preferred Stock, par value $.001 per share (the "Preferred
Stock"), each of which, as a result of the Reverse Split, was converted into 250
shares of Common Stock and has a like number of votes per share, voting together
with the Common Stock. Prior to the Merger, FMC held approximately 25.4% of the
outstanding shares of Common Stock, which were acquired through two series of
transactions.
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There were outstanding 10,000 shares of FMC Common Stock immediately
prior to the Merger. These shares were exchanged for a total of (i) 11,276,750
shares of Common Stock, which, as a result of the Reverse Split, is now 375,875
shares of Common Stock, and (ii) 1,037,461 shares of Preferred Stock. As a
result of the Merger, Holders of Common Stock immediately prior to the Merger
and former FMC stockholders each owned 50% of the issued and outstanding shares
of Common Stock immediately following the Merger. All of the shares of Preferred
Stock issued to the former FMC stockholders were converted into Common Stock.
Holders of Common Stock immediately prior to the Merger and former FMC
stockholders own approximately 4% and 96%, respectively, of the outstanding
Common Stock. Although legally The Lehigh Group acquired First Medical
Corporation for accounting purposes, First Medical Corporation is considered the
accounting acquirer (i.e., the reverse acquisition), since the former owners of
FMC acquired 96% of the stock of the Company.
Under the terms of the Merger Agreement and concurrently with the
implementation of a Reverse Stock Split, the Company changed its name to First
Medical Group, Inc.
LEHIGH
Lehigh (formerly The LVI Group Inc.) through its wholly owned
subsidiary, HallMark Electrical Supplies Corp., is engaged in the distribution
of electrical supplies for the construction industry both domestically
(primarily in the New York Metropolitan area) and for export.
Prior to 1994, Lehigh, through its wholly owned subsidiaries, had been
engaged in the following other businesses: (i) through certain of its operating
subsidiaries ("NICO Construction") interior construction: (ii) through its
wholly owned subsidiary, LVI Environmental Services Group Inc. ("LVI
Environmental"), and subsidiaries thereof, asbestos abatement: (iii) through
Riverside Mfg., Inc. ("Riverside"), the design, production and sale of
electrical products: (iv) through Mobile Pulley and Machine Works, Inc. ("Mobile
Pulley"), the manufacture and sale of dredging equipment and precision machined
castings: and (v) through LVI Energy Recovery Corporation ("LVI Energy"), energy
recovery and power generation and landfill closure services. All of such other
businesses were transferred or sold prior to 1994.
HALLMARK
ELECTRICAL SUPPLIES
HallMark was acquired by Lehigh in December 1988. HallMark's sales
include electrical conduit, armored cable, switches, outlets, fittings, panels
and wire which are purchased by Hallmark from electrical equipment manufactures
in the United States. All of HallMark's sales are domestic. All of Lehigh's
revenues are attributed to HallMark.
Domestic sales are made by HallMark employees. Fourteen customers
accounted for approximately 69%, 61%, and 72% (including one customer, which
accounted for approximately 14%, 25%, and 18%) of HallMark's total domestic
sales in 1997, 1996 and 1995, respectively. The loss of any of these customers
could have a material adverse effect on its business. From November 1, 1992
until October 31, 1996, HallMark's export business was conducted primarily from
Miami, Florida. HallMark's export business has been discontinued.
HallMark's only customer whose sales exceed 10% of Lehigh's
consolidated revenues (prior to the Merger) is Adco Electric. This customer
accounted for an aggregate of approximately 14% of Lehigh's consolidated revenue
(prior to the Merger).
Management believes that many companies (certain of which are
substantially larger and have greater financial resources than HallMark) are in
competition with HallMark. Management believes that the primary factors for
effective competition between Hallmark with its competitors are price, in-stock
merchandise and a reliable delivery service. As a result, orders for merchandise
are received daily and shipped daily; hence, backlog is insignificant.
Management believes that HallMark is generally in compliance with
applicable governmental regulations and that these regulations have not had and
will not have a material adverse effect on its business or financial condition.
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EMPLOYEES
As of March 1, 1998 HallMark had 36 employees. Approximately 80% of
such employees are compensated on an hourly basis.
Lehigh and HallMark comply with prevailing local contracts in the
respective geographic locations of particular jobs with respect to wages, fringe
benefits and working conditions. Most employees of HallMark are unionized. The
current collective bargaining agreement for Hallmark, which is with the
International Brotherhood of Electrical Workers, Local Union #3, expires on
April 30, 1999.
FMG
FMG is an international provider of management, consulting and
financial services to physicians, hospitals and other health care delivery
organizations and facilities. FMG's diversified operations are currently
conducted through two divisions: (i) a physician practice management division
which provides physician management services, including the operation of
clinical facilities and management services to Medical Service Organizations,
and (ii) an international division which currently manages western-style medical
centers in Eastern Europe and the CIS.
INDUSTRY BACKGROUND
The role of the primary care physician is changing dramatically.
Historically, the health care services industry was based on a model in which
physician specialists played a predominant role. This model contributed to
over-utilization of specialized health care services and, in turn, increases in
health care costs at rates significantly higher than inflation. In response,
third-party payers have been implementing measures to contain costs and improve
the availability of medical services. These measures, which include managing the
utilization of specialized health care services and alternative methods of
reimbursement, have caused the health care industry to evolve toward models that
contain health care costs more efficiently. In these models, the primary care
physician and physician management organization are playing increasingly
important roles.
FMG believes that two important trends contributing to the evolution
of the health care services industry define its business opportunities. First,
physicians are increasingly abandoning traditional private practices in favor of
affiliations with larger organizations such as FMG that can provide enhanced
management capabilities, information systems and capital resources. This
transformation of physician practice is based on an increasingly competitive
health care environment characterized by intense cost containment pressure,
increased business complexity and uncertainly regarding the impact of health
care reform on physicians.
The second trend is that many payers and their intermediaries,
including HMO's, are increasingly looking to outside providers of physician
services to manage their professional medical requirements and to share the risk
of providing services through capitation arrangements. As these payers seek to
limit their health care costs by reducing the fee-for-service component paid to
their medical service providers, there is additional pressure on smaller
providers to consolidate and realize the efficiencies that can be achieved by
operating in larger practice groups.
DOMESTIC OPERATIONS
Cost containment, industry consolidation and changes in reimbursement
methods are causing difficulties for health care providers, particularly
not-for-profit hospitals. As a result of intense competition from large
for-profit hospitals, not-for-profit hospitals must develop effective plans for
attracting and retaining patient flow. Such plans may include, among other
things, (i) reducing or changing the services provided in order to better
utilize current facilities, equipment and space, (ii) entering into new
contracts with physician groups, HMO's, and other third party payors, and (iii)
various cost-cutting measures. Ultimately, a facility's ability to adapt to
changing environments requires access to capital and management expertise,
services which FMG is willing and able to provide.
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INTERNATIONAL MARKETS
The American health care delivery system and its related services
remain a valuable export. The internationally recognized level of training,
technology and services associated with the American health care systems and
their professionals continues to enjoy increasing demand among both expatriates
and wealthy nationals in FMG's expanding foreign markets. FMG's value is
reflected in the premium prices, which its clients are willing to pay for access
to comprehensive American health care and related services.
STRATEGY OF FMG
FMG's strategy with respect to its physician practice management
division is to develop its business by addressing significant changes in the
role and practice patterns of the primary care physician in the health care
services industry. Elements of this strategy include:
(i) FMG plans to offer health care providers a full array of advanced
management services including, but not limited to: utilization management;
information systems; human resources management; financial control systems;
outcomes measurement and monitoring; customer service programs; training and
education; financial services; strategic planning; network development; and risk
contracting. These services will be offered as a comprehensive package or
individually, but through one point of contact, creating a "one-stop shop" for
management services.
(ii) FMG's management believes that nationwide concerns over
escalating health care costs and the possibility of legislated reforms are
increasing the emphasis on managed care, integrated networks of health care
providers and prepaid, capitated arrangements. Increased managed care
penetration is generating more recognition of the benefits of organized
physician groups serving large patient populations as well as reducing the
reimbursement rates for services rendered. In anticipation of such changes in
the health care environment, FMG continues to review and revise its business
mix.
(iii) Continued Development of the International Division. FMG will
continue the development and expansion of its international division. FMG
believes that through its continuing development efforts, FMG will be positioned
to become a premier owner, operator and manager of international primary care
clinics, acute care hospitals and other health care delivery organizations.
(iv) FMG strives to deliver a comprehensive range of diverse medical
services to meet the specific needs of its clients in each of FMG's unique
markets. In response to demands for western style hospitals in the CIS, FMG
commenced development of the American Hospital of Moscow, pursuant to which FMG
will establish the first western-style hospital in the CIS.
(v) An integral part of FMG's strategy is to provide an environment
for medical education and training of local medical professionals and health
care administrators. In this regard, FMG will continue to be active in
sponsoring exchange programs with western facilities and teaching institutions
such as the Baylor College of Medicine in Houston, Texas. FMG has also organized
an in-house mentor program to expose local medical professionals and aspiring
physicians to the western health care system.
DIVISION OF FMG
PHYSICIAN PRACTICE MANAGEMENT DIVISION
FMG's physician practice management operations are currently conducted
through MedExec. MedExec functions in two capacities as a management services
organization: (i) owning and operating twelve primary care centers (located in
Florida and Indiana) which have full risk contracts for primary care and Part B
services and partial risk (50%) contracts for Part A services, and (ii) managing
sixteen multi-specialty groups (located in Florida and Texas) with
fee-for-service and full risk contracts for primary care and Part B services and
partial risk (50%) contracts for Part A services. Full risk contracts are
contracts with managed care companies where FMC assumes essentially all
responsibility for a managed care members' medical costs and partial risk
contracts are contracts where FMC assumes partial responsibility for a managed
care members' medical costs. Revenue from the primary care centers is derived
primarily from the predetermined amounts paid per member (capitation") by
Humana. In addition to the payments from Humana,
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the primary care centers received copayments from commercial members for each
office visit, depending upon the specific plan and options selected by
individual members and receive payments from non-HMO members on a
fee-for-service basis. Revenue from the multi-specialty practices managed by FMC
are determined based on per member per month fees and/or a percentage of the net
profits for Part A and Part B service funds for such centers.
Revenue from the multi-specialty practices are obtained by FMC through
management agreements. In Florida, FMC is entitled to receive (i) from Humana
Medicare members, an amount equal to $4.50 per member per month plus a
percentage of Part A profits, Part B profits and Medicare Membership Conversion
fees ranging from 9% to 4% based upon Medicare membership, and (ii) for Humana
commercial HMO members, an amount equal to $1.50 per member per month plus 5% of
Part A profits and Part B profits. The members of the practices are patients of
the physicians who are enrolled as Humana members.
FMC is not licensed to practice medicine. FMC employs or manages
licensed physicians to work at the primary care centers in Florida and Indiana,
which centers provide the delivery of medicine. In Texas, FMC provides
utilization, billing, human resources, management information systems, senior
executive management, financial consulting and risk evaluation as a management
services organization. In order to better serve its existing markets and
potential markets, FMC has established four geographic operating regions, to
wit, the East Coast of Florida, the West Coast of Florida, the Midwest, and the
Southwest.
In connection with the operation of such primary care centers in
Florida and Indiana, FMC employs all of the personnel, including physicians who
agree to provide the necessary clinical skills, required in such centers. FMC
compensates its physician employee's bi-weekly pursuant to the terms of written
employment agreements. The written employment agreements are for a term of 2-3
years, provide for termination "with cause", provide for a base salary and a
bonus (which bonus is determined by formula comprised of quality management,
utilization management, medical records documentation, patient
satisfaction/patient education and time and motion management) contain a
non-competition provision and contain provisions outlining the duties of the
physician and FMC.
FMC currently employs physicians in Florida and Indiana, which states
do not have regulations on the corporate practice of medicine. In Texas, there
are regulations on the corporate practice of medicine, and FMC does not employ
any physicians and has no ownership interest in or control of the entity in
which physicians are employed. In all states other than Texas, FMC retains an
ownership interest or control in the various clinics it operates. FMC operates
an office in Illinois for administrative services only and has employed
physicians in Indiana. FMC maintains a proprietary database for physicians who
might be available to be employed at FMC's owned and operated clinics in
particular specialties and locations, and experts to create an in-house
recruiting department.
FMC generates fees at its primary care centers on a fee-for-service
basis and/or capitated basis. Under fee-for-service arrangements, FMC bills and
collects the charges for medical services rendered by contracted or employed
health care professionals and also assumes the financial risks related to
patient volume, payor risk, reimbursement and collection rates. Under capitated
arrangements, FMC assumes the risk and receives revenues at a fixed rate from
HMO's at contractually agreed-upon per member per month rates for all the
primary care needs of a patient. Under its HMO contracts, FMC receives a fixed,
prepaid monthly fee for each covered life in exchange for assuming
responsibility for the provision of medical services, subject to certain
limitations. To the extent that enrollees require more frequent or extensive
care than was anticipated by FMC, the revenue to FMC under a contract may be
insufficient to cover the costs of the care that was provided. A substantial
portion of the patients seeking clinical services from the company's primary
care centers are members of HMO's with which FMC maintain contractual
relationships.
Additionally, FMC has entered into contracts with certain HMO's to
manage the delivery of comprehensive medical services to enrollees at FMC's
clinics located in Florida, Texas and Indiana. A substantial portion of the
revenues of FMC's managed care business are derived from prepaid contractual
arrangements with Humana, pursuant to which Humana pays FMC a capitated fee. FMC
employs primary care physicians to work at FMC clinics in Florida and Indiana.
FMC also provides for other services with hospitals and medical specialists at
negotiated prices for both capitated and non-capitated (i.e. fee-for-service)
services. Due to FMC's risk for the cost of providing health care services, it
carefully manages utilization of primary care, hospital and medical specialist
services.
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In addition, FMC contracts with primary care medical practices
pursuant to which FMC provides a variety of management services. In particular,
FMC provides management services which improve physician practices' operating
efficiencies through standardization of operating processes, including the
installation of information technology and billing systems, and assists such
practices in contracting on a network basis to insurers, HMO's and other payers.
In consideration for such management services, FMC receives an annual management
fee and participates in profits.
Neither FMC, its subsidiary, MedExec, nor its affiliates are licensed
to operate as HMO's.
INTERNATIONAL MEDICAL CLINICS DIVISION
FMG's International division currently specializes in developing and
managing health care facilities in Eastern Europe, the CIS and other developing
countries. Currently, FMG contracts to provide services in Moscow, St.
Petersburg and Kiev of the CIS; Warsaw, Poland; and Prague, Czech Republic.
Revenues of FMG's international division are primarily derived from
fee-for-service charges and annual non-refundable membership fees charged to
corporations, families and individuals. A variety of diverse membership plans
are available and can be tailored to meet the unique needs of corporate clients.
Based upon its experience, FMG's management believes that a significant and
increasing portion of the international division's revenues will be derived from
local customers who seek medical services on a fee-for-service basis. Local
customers currently account for approximately 25% of the international
division's revenue.
Generally, corporations are required to pay an annual membership fee
as well as placing an advance deposit with FMG for future services rendered
based on the selected membership plan and size of the respective organizations.
Membership plans offer a wide range of benefits including 24-hour emergency
access, monthly medical newsletters and specials; fee discounts and cross
membership with other clinics. FMG also offers an insurance processing service
for corporate members. FMG's corporate membership currently includes
approximately five hundred international corporations.
In order to meet the changing needs of FMG's corporate clients and to
provide expanded access to western health care to potential clients, FMG has
recently developed and implemented a variety of comprehensive managed care
plans. These plans range from individual and family plans to corporate plans
covering up to 2,000 employees in various and sometimes remote locations.
Based upon its experience, FMG's management believes that a
significant and increasing portion of the international division's revenues will
be derived from local customers who seek medical services on a fee-for-service
basis.
COMPETITION
The provision of physician management services is a highly competitive
business in which FMG competes for contracts with several national and many
regional and local providers of physician management services. Furthermore, FMG
competes with traditional managers of health care services, such as hospitals,
which directly recruit and manage physicians. Certain of FMG's competitors have
access to substantially greater financial resources than FMG.
Internationally, FMG has relatively little competition on a
multinational scale, but faces strong competition in local markets from small
entrenched and start-up health care providers.
While the bases for competition vary somewhat between business lines,
competition is generally based on cost and quality of care. More particularly,
in the area of managed care, FMG believes the market for developing and
providing management of primary care networks in the United States which
contract with HMO's and employers will increasingly be based on patient access,
quality of care, management and cost.
MARKETING
FMC's physician practice management division has developed two
marketing methods. The primary method is to conduct joint marketing efforts with
HMO's. These efforts focus on customer service, quality and access programs and
are designed to attract new members to the HMO, retain current members
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and enroll members at the company's medical centers. The second method focuses
on development of local market awareness and creating a positive image of FMC
among the physician community in order to create opportunities for additional
physician management contracts.
The management, consulting and financial services division currently
relies on the ability of the management team to leverage their reputations,
experience and network of contacts to develop new clients or arrange for new
contracts with existing clients.
International marketing is done at a local level through traditional
media advertising and promotional activities. The image and status of the
clinics themselves and the medical personnel are carefully cultivated through an
intensive public relations campaign. The network of international clinics is
also collectively marketed to multinational corporations through representatives
also collectively marketed to multinational corporations through representatives
who maintain relationships and develop new contracts with the benefits managers.
GOVERNMENT REGULATION OF DOMESTIC OPERATIONS
FMC's domestic operations and relationships are subject to a variety
of governmental and regulatory requirements. A substantial portion of the
company's revenue is derived from payments made by government-sponsored health
care programs (primarily Medicare). These programs are subject to substantial
regulation by the federal and state governments, which are continually revising
and reviewing the programs and their regulations. Any determination of material
noncompliance with such regulatory requirements or any change in reimbursement
regulations, policies, practices, interpretations or statutes that places
material limitations on reimbursement amounts or practices could adversely
affect the operations of FMC.
In addition to current regulation, the public and state and federal
governments have recently focused significant attention on reforming the health
care system in the United States. A broad range of health care reform measures
have been introduced in Congress and in certain state legislatures. Among the
proposals under consideration are cost controls on hospitals, insurance market
reforms to increase the availability of group health insurance to small
businesses, requirements that all businesses offer health insurance coverage to
their employees and the creation of a single government health insurance plan
that would cover all citizens. It is not clear at this time what proposals will
be adopted, if any, or, if adopted, what effect, if any, such proposals would
have on FMC's business. Certain proposals, such as cutbacks in Medicare programs
and containment of health care costs that could include a freeze on prices
charged by physicians and other health care providers could adversely affect the
Company. There can be no assurance that currently proposed or future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
FMC's operating results.
Continuing budgetary constraints at both the federal and state level
and the rapidly escalating costs of health care and reimbursement programs have
led, and may continue to lead, to relatively significant reductions in
government and other third-party reimbursements for certain medical charges. The
Company's health care professionals are subject to periodic audits by government
reimbursement programs to determine the adequacy of coding procedures and the
reasonableness of charges.
All Medicare and Medicaid providers and practitioners are subject to
claims review, audits and retroactive adjustments, recoupments, civil monetary
penalties, criminal fines and penalties, and/or suspension or exclusion from
payment programs for improper billing practices. Federal regulations also
provide for withholding payments to recoup amounts due to the programs. Periodic
audits of health care professionals by government reimbursement programs have
not had any impact on FMC.
Federal law prohibits the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
care program (e.g., Medicaid) patients or patient care opportunities, or in
return for the purchase, lease, order or recommendation of items or services
that are covered by Medicare or state health care programs. Violations of this
law are felonies and may subject violators to penalties and exclusion from
Medicare and all state health care programs. In addition, the Department of
Health and Human Services may exclude individuals and entities from
participation in Medicare and all state health care programs based on a finding
in administrative proceedings that the individual or entity has violated the
antikickback statute. FMC has not violated the antikickback statute; if either
FMC or its employees violated the statute they could be subject to sanctions.
Only one physician holds FMC common stock and this physician does not refer any
patients to FMC, is the medical director of FMC,
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oversees the medical aspect of the physician practice management division, and
has no bonus arrangement with FMC; therefore management believes the Federal
anti-kickback statute is not applicable.
Every state imposes licensing requirements on individual physicians
and on health care facilities. In addition, federal and state law regulate HMO's
and other managed care organizations with which FMC may have contracts. Many
states require regulatory approval before acquiring or establishing certain
types of health care equipment, facilities or programs. Since FMC is not an
insurer, there is no insurance regulation of FMC's operations. Texas prohibits
the corporate practice of medicine. The business structure that FMC has adopted
in Texas in order to comply with the prohibitions on the corporate practice of
multi-specialty medicine is a full service management agreement wherein FMC
manages an independent group of physicians by providing utilization, billing,
human resources, management information systems, senior executive management,
financial consulting and risk evaluation for a negotiated fee.
The laws of many states prohibit physicians from splitting fees with
nonphysicians and prohibit business corporations from providing or holding
themselves out as providers of medical care. While FMC believes it complies in
all material respects with state fee splitting and corporate practice of
medicine laws, there can be no assurance that, given varying and uncertain
interpretations of such laws, FMC would be found to be in compliance with all
restrictions on fee splitting and corporate practice of medicine in all states.
FMC currently operates in Texas through professional corporations, and has
recently formed professional corporations or qualified professional corporations
to do business in several other states where corporate practice of medicine laws
may require the company to operate through such a structure. A determination
that FMC is in violation of applicable restrictions on fee splitting and the
corporate practice of medicine in any state in which it has significant
operations could have a material adverse effect on the company.
FMC currently operates in only one state that prohibits the corporate
practice of medicine, which state is Texas. Risks associated with expanding
FMC's business into other states that have this type of prohibition include (i)
the issue of consolidation of revenues and (ii) preventing FMC from exploiting
the physician-patient relationship in pursuit of profits. FMC does not
consolidate the revenues from Texas, but operates as a management services
organization under a management contract. If FMC expands its business into other
states which prohibit the corporate practice of medicine, it will operate as a
management services organization under a management contract.
FMC attempts to mitigate the risk of potentially high medical costs
incurred in catastrophic cases through stop-loss provisions, reinsurance and
other special reserves which limit FMC's financial risk. To date, such
protection has been provided to FMC through its provider agreements with Humana.
There can be no assurances that the agreements, which provide such insurance to
FMC, will continue. If assumption of capitated payments risk through contracts
with HMO's could be construed as insurance, FMC believes there would be no
affect from state insurance laws due to the circumstance that all of FMC's
contracts with HMO's provides for stop-loss coverage by the HMO's. Any
determination of material noncompliance with insurance regulations or any change
in the stop-loss coverage by the HMO's could adversely affect the operations of
FMC.
Over the last twenty years, the health care industry has become
subject to an increasing number of lawsuits alleging medical malpractice and
related legal theories, including the withholding of approval for necessary
medical services. Often, such lawsuits seek large damage awards, forcing health
care professionals to incur substantial defense costs. Due to the nature of its
business, FMC, from time to time, becomes involved as a defendant in medical
malpractice lawsuits, some of which are currently ongoing, and is subject to the
attendant risk of substantial damage awards. The most significant source of
potential liability in this regard is the negligence of health care
professionals employed or contracted by the company.
One part of FMC's management services involve the provision of
professional liability insurance ("PLI") coverage for its physicians. FMC
currently provides this coverage through an umbrella PLI policy with Zurich
American Insurance Group maintained for substantially all of the company's
employees and independent contractors. This PLI policy generally provides
coverage in the amount of $1,000,000 per physician and per claim, subject to an
aggregate per physician limit of $3,000,000 per year. In its insurance policy,
FMC also maintains the right to purchase extended coverage beyond the expiration
of the policy period for an agreed upon premium to cover the costs of claims
asserted after the expiration of the effective policy. FMC maintains
professional liability insurance on a claims made basis in amounts deemed
appropriate by management, based upon historical claims and the nature and risks
of its business. However, there can be no assurance that a future claim or
claims will not exceed the limits of available insurance
9
<PAGE>
coverage, that any insurer will remain solvent and able to meet its obligations
to provide coverage for any claim or claims or that coverage will continue to be
available or available with sufficient limits to adequately insure FMC's
operations in the future. EMPLOYEES
As of March 1, 1998, FMC had approximately 755 employees.
Approximately 20% of such employees are compensated on an hourly basis.
FMC complies with prevailing local contracts in the respective
geographic locations of particular jobs with respect to wages, fringe benefits
and working conditions.
ITEM 2. PROPERTIES
FMG's principal executive office is located at 1055 Washington
Boulevard, Stamford, Connecticut 06901, and its telephone number is (203)
327-0900.
FMC leases approximately 2,400 square feet in Stamford, Connecticut
expiring on September 30, 2000 at an annual rent of $65,000 which progressively
escalates to $75,000 in the third year of this lease. FMC leases approximately
5,000 square feet in Miami, Florida to provide administrative support pursuant
to a lease expiring on December 31, 1998 at an annual rental of $147,000. FMC
leases approximately 1,400 square feet in Tampa, Florida for use by SPI
Hillsborough pursuant to a lease expiring on November 30, 2001 at an annual
rental of $26,736. FMC leases approximately 4,100 square feet in Maywood,
Illinois pursuant to a lease expiring on November 30, 2001 at an annual rental
of $48,000.
In addition, FMG through its subsidiaries leases two facilities in
Warsaw and Prague, which facilities are used as medical clinics, at monthly
rents of $3,110 and $6,700, respectively.
HallMark leases 28,250 square feet of office and warehouse facilities
in Brooklyn, New York, pursuant to a lease expiring on June 30, 2004, at an
annual rental of approximately $78,000 (which progressively escalates to
$106,000 in 2003). In December 1994, HallMark leased 4,500 square feet of
additional warehouse facilities in Brooklyn, New York, pursuant to a lease
expiring on June 30, 2004, at an annual rental of $18,000 (which progressively
escalates to $21,600).
FMG believes that all of its facilities are adequate for the business
in which it is engaged.
ITEM 3. LEGAL PROCEEDINGS
FMG is involved in various legal proceedings incidental to its
business, substantially all of which involve claims to the alleged malpractice
of employed and contracted medical professionals and to the failure to render
care resulting in a violation or infringement of civil rights and, no individual
item of litigation or group of similar items of litigation, taking into account
the insurance coverage available to FMG, is not likely to have a material
adverse effect on FMG's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of the Company's shareholders held on November
12, 1997, the holders of the Company's common stock approved the following
proposals:
To effect a 1 - for 30 reverse stock split of the common stock, par
value $.001 per share, of the Company's common stock.
Shares Voted Shares Voted Shares withheld
IN FAVOR AGAINST OR ABSTAINED
-------- ------- ------------
225,334,799 178,532 6,536
10
<PAGE>
To approve the Company's Stock Option Plan.
Shares Voted Shares Voted Shares withheld
IN FAVOR AGAINST OR ABSTAINED
-------- ------- ------------
224,172,883 1,312,535 34,449
Proposal to approve the Company's Compensation Plan.
Shares Voted Shares Voted Shares withheld
IN FAVOR AGAINST OR ABSTAINED
-------- ------- ------------
217,617,583 1,295,176 6,607,108
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed on the OTC Bulletin Board. On March 3,
1998, there were approximately 7,791 holders of record of the Common Stock
(excluding shares held in "nominee" or "street" name).
The following table reflects the range of the reported high and low
closing prices of Common Stock on the NYSE for the calendar quarters indicated.
The information in the table and in the following paragraph has been adjusted to
reflect retroactively all applicable stock splits and stock dividends but not
the Reverse Split, except for the fourth quarter for the period commencing
November 13, 1997 through the date hereof.
1996:
First Quarter $ 11/16 $ 7/16
Second Quarter 9/16 3/8
Third Quarter 11/16 1/4
Fourth Quarter 15/32 1/8
1997:
First Quarter $ 1/4 $ 13/32
Second Quarter 14/32 1/8
Third Quarter 15/32 3/32
Fourth Quarter from October 1,
1997 through November 12, 1997 1/4 1/8
Fourth Quarter from November 13,
1997 through December 31, 1997 4-1/4 1-1/4
1998:
First Quarter through March 3, 1998 $ 3/8 $ 1/4
The prices above reflect trading of the Common Stock on the NYSE
through November 12, 1997. Subsequent to the delisting of the Common Stock from
the NYSE, the prices above for the period from November 13, 1997 through the
date hereof reflect trading of the Common Stock on the OTC Bulletin Board.
The Company has not paid any dividends in 1996 or 1997.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIRST MEDICAL GROUP, INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
STATEMENT OF OPERATING DATA
- ---------------------------
<TABLE>
<CAPTION>
Years ended
December 31, 1993(1) 1994(1) 1995(1) 1996(1) 1997
------- ------- ------- ------- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Capitated revenue $ 10,563 $ 20,253 $ 21,744 $ 45,070 $ 58,234
Fee-for-service & related rev 524 1,065 928 7,944 12,849
Other -- -- -- -- 8,392
-------- -------- -------- -------- --------
Total revenue 11,087 21,318 22,672 53,014 79,475
Medical expenses/Cost of Sales 8,405 16,568 18,444 43,526 71,438
-------- -------- -------- -------- --------
Gross profit 2,682 4,750 4,228 9,488 8,037
Operating expenses:
Salaries and related benefits 670 1,651 2,434 3,503 3,842
Other operating expenses 991 1,771 2,200 8,201
5,194
Impairment loss from
intangibles -- -- -- -- 3,960
-------- -------- -------- -------- --------
Total operating expenses 1,661 3,422 4,634 8,697 16,003
-------- -------- -------- -------- --------
Income (loss) from operations 1,021 1,328 (406) 791 (7,966)
Other expenses (income) 218 (35) (42) 55 576
-------- -------- -------- -------- --------
Net income (loss) before
income tax benefit 803 1,364 (364) 736 (8,542)
Income taxes (2) 321 545 -- 413 (63)
-------- -------- -------- -------- --------
Net income (loss) before
cumulative effect of a change
in accounting principle (2) 482 818 (364) 323 (8,479)
Cumulative effect of a change
in accounting principle -- -- -- -- (991)
-------- -------- -------- -------- --------
Net income (loss) (2) $ 482 $ 818 $ (364) $ 323 $ (9,470)
======== ======== ======== ======== ========
Net income (loss) per
share before cumulative
effect of a change in
accounting principle $ .05 $ .09 $ (.04) $ .04 $ (.92)
Cumulation effect of
change in accounting
principle -- -- -- -- (.11)
-------- -------- -------- -------- --------
Net income (loss) $ .05 $ .09 $ (.04) $ 1.04 $ (1.03)
======== ======== ======== ======== ========
Pro forma fully diluted weighted
average number of FMG shares
currently outstanding (3) 9,021 9,021 9,021 9,021 9,202
Cash Dividends as Declared $ 17 $ 117 $ 38 $ -- $ --
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Working Capital $ 279 $ 272 $ (302) $ (2,047) $ (1,405)
Total Assets 2,739 4,128 3,045 12,323 27,545
Current Liabilities 1,341 3,157 2,817 10,596 22,506
Stockholder's Equity 1,398 972 227 703 (1,054)
Book Value per share-fully diluted $ .15 $ .11 $ .03 $ .08 $ (.11)
</TABLE>
- - - - - - - - - - - - -
(1) The selected financial data for the years ended December 31, 1992,
1993, 1994 and 1995 has been derived from the audited combined
financial statements of MedExec, Inc. and subsidiaries; SPI Managed
Care, Inc., and SPI Managed Care of Hillsborough County, Inc.
(collectively, "MedExec"). The data for 1996 has been derived from the
1996 consolidated financial statements of FMC.
(2) Prior to December 31, 1995, MedExec. Inc., and prior to May 1994, SPI
Managed Care, Inc. were S corporations and not subject to Federal and
Florida corporate income taxes. The Statement of Operations data
reflects a proforma provision for income taxes as if the Company was
subject to Federal and Florida corporate income taxes for all periods.
This proforma provision for income taxes is computed using a combined
effective Federal and State tax rate of 40% 1996 and 1997 reflect
actual income tax expense.
(3) The amount of FMC stock issued and outstanding has been adjusted to
reflect the exchange of 10,000 shares for 11,276,750 shares of the
Lehigh Group, plus the conversion of the Preferred Stock and the
1-for-30 reverse stock split.
On July 9, 1997 at a Special Meeting (the "Special Meeting") of
stockholders of the Lehigh Group, Inc. ("Lehigh"), the stockholders of
Lehigh approved the merger (the "Merger") pursuant to the terms of the
Agreement and Plan of Merger dated as of October 29,1996 (the "Merger
Agreement") among Lehigh, First Medical Corporation ("FMC") and Lehigh
Management Corp., a wholly-owned subsidiary of Lehigh ("Merger Sub").
On the same day, Merger Sub was merged with and into FMC and each
outstanding share of common stock of FMC (the "FMC Common Stock"), was
exchanged for (i) 1,127.675 shares of Lehigh's Common Stock, par value
$.001 per share ("Lehigh Common Stock"), and (ii) 103.7461 shares of
Lehigh's Series A Convertible Preferred Stock, par value $.001 per
share (the "Lehigh Preferred Stock"), each of which is convertible
into 250 shares of Lehigh Common Stock and has a like number of votes
per share, voting together with the Lehigh Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, including the notes thereto, contained
elsewhere in this 10-K.
GENERAL
On July 9, 1997 at a Special Meeting (the "Special Meeting") of
stockholders of the Lehigh Group, Inc. ("Lehigh"), the stockholders of Lehigh
approved the merger (the "Merger") pursuant to the terms of the Agreement and
Plan of Merger dated as of October 29, 1996 (the "Merger Agreement") among
Lehigh, First Medical Corporation ("FMC") and Lehigh Management Corp., a
wholly-owned subsidiary of Lehigh ("Merger Sub"). On the same day, Merger Sub
was merged with and into FMC and each outstanding share of common stock of FMC
(the "FMC Common Stock"), was exchanged for (i) 1,127.675 shares of Lehigh's
Common Stock, par value $.001 per share ("Lehigh Common Stock"), and (ii)
103.7461 shares of Lehigh's Series A Convertible Preferred Stock, par value
$.001 per share (the "Lehigh Preferred Stock"), each of which is convertible
into 250 shares of Lehigh Common Stock and has a like number of votes per
shares, voting together with the Lehigh Common Stock. As a result of such
merger, legally FMC became a wholly owned subsidiary of the Company. See
"Business - Merger with FMC." The financial statements presented reflect First
Medical Corporation's acquisition of Lehigh since the acquisition date of July
9, 1997. Although legally The Lehigh Group acquired First Medical Corporation,
for accounting purposes First Medical
13
<PAGE>
Corporation is considered the accounting acquirer (i.e., the reverse
acquisition). Therefore, the operating results of Lehigh are included in the
statement of operation since the acquisition date (July 9, 1997) and the
December 31, 1997 balance sheet reflects the effect of the acquisition of
Lehigh. The acquisition of Lehigh's business has no material effect on First
Medical's business since they are completely separate industries.
RESULTS OF OPERATIONS - FMG
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH YEAR ENDED
DECEMBER 31, 1996
REVENUE. Total revenue of FMG for the twelve months ended December 31,
1997 and 1996 were $79.5 million and $53.0 million, respectively, of which 73%
and 85%, respectively, was derived from prepaid contractual agreements with
Humana pursuant to which Humana pays FMG a capitated fee ("HMO revenue"). During
the twelve months ended December 31, 1997, $62.1 million or 78% of FMG's revenue
were derived from the physician practice management division, $9.0 million or
11% was derived from the international medical clinics division, and $8.4
million or 11% was derived from the electrical supply division. During the
twelve months ended December 31, 1996, revenue derived from the physician
practice management division was $46.3 million, or 87% of FMG's revenue and $6.7
million or 13% was derived from the international medical clinics division. The
HMO revenue growth was primarily a result of 1) new provider agreements, as of
September 1996, to manage a center in New Port Richey, Florida, as of October
1996, to manage additional centers in Lutz, Florida and South Dale Mabry,
Florida and as of February 1996, to manage two centers in Gary, Indiana, and as
of August 1997 to manage a center in Springhill, Florida; 2) changing to a full
risk contract as of October 1996 in Hammond, Indiana; and 3) including the
Durham, Texas medical center in the 1997 consolidated financial statements.
Revenue related to these additional centers represent an increase of $19.1
million and the revenue related to the other centers decreased by $6.0 million,
due to a decrease in membership in the South Florida market.
MEDICAL EXPENSE/COST OF SALES. Medical expenses increased $22.0
million, or 51%, to $65.5 million (excluding the cost of sales from the
electrical supply division) for the twelve months ended December 31, 1997 from
$43.5 million for the same period in 1996. The entire increase ($21.9 million or
100%) resulted from medical services provided under the new provider agreements
and the consolidating of Durham, Texas in 1997. Medical expenses related to the
other domestic centers decreased by $1.8 million (from $34.1 million in 1996 to
$32.3 million in 1997) due to the lower membership and revenue base.
International clinics medical expenses increased $1.8 million, to $7.1 million
in 1997 from $5.4 million in 1996 due to increased number of patients. Domestic
medical expenses as a percentage of HMO and fee for service revenue ("medical
loss ratios") were 97% and 84%, respectively, for the twelve months ended
December 31, 1997 and 1996. The increase in medical expenses was due to changes
in the program benefits provided Humana. FMG has recently implemented controls
to monitor medical expenses in the future. The recently implemented controls to
monitor expenses primarily relate to a more diligent review of utilization. Cost
of sales as of percentage of revenues for the electrical supply distribution
business was 70.9%.
OPERATING EXPENSES. Operating expenses (excluding the impairment loss
on intangibles) increased by $3.3 million, or 38%, to $12.0 million, for the
twelve months ended December 31, 1997 from $8.7 million for the same period in
1996. The increase was primarily due to the electrical supply distribution
division for $2.4 million. The remaining increase of $.9 million was due to the
additional costs from operating the new centers. As a percent of revenue,
operating expense decreased to 15.2% in 1997 as compared to 16.4% for the same
period in 1996. Write-off of intangibles of $3.9 million represent the
impairment loss from the goodwill recorded at the time of the Lehigh
acquisition.
OTHER EXPENSE. Interest expense increased $520,856, from $55,523 in
1996 to $576,379 in 1997 due to the interest related to the debt assumed from
the Lehigh merger (approximately $300,000 in interest) with the remaining
increase due to higher borrowing levels to support the operating losses in 1997
in the physician practice management division.
The cumulative effect of a change in accounting principle of $991,405
relates to the consolidating of the Durham Clinic in 1997 pursuant to the
emerging issues taskforce abstract No. 97-2.
NET (LOSS) INCOME. Net loss for the twelve months ended December 31,
1997 was $9.5 million compared to net income of $.3 million for the same period
in 1996.
14
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
REVENUE. The total revenues of FMC for the year ended December 31,
1996 and 1995 were $53.0 million and $22.7 million, respectively, of which 85%
and 96%, respectively, was derived from prepaid contractual agreements with
Humana pursuant to which Humana pays FMC a capitated fee (""MO revenue"). HMO
Revenue is derived primarily from the predetermined prepaid contractual
arrangements paid per member per month by Humana to the primary care centers
which are owned and operated b the Company. Under the capitated fee
arrangements, FMC assumes the risk of providing medical services for each
managed care member. To the extent that members require more frequent or
extensive care, the revenue to FMC may be insufficient to cover the cost of the
care that was provided. During the year ended December 31, 1996, $46.4 million
or 88% of FMC's revenues were derived from the physician practice management
division and $6.7 million or 12% was derived from the international medical
clinics division. As of December 31, 1996 the FMC Healthcare Services division
had not obtained any definitive management consulting service agreements.
Revenue increased by $30.3 million or 133% to $53.0 million for the year ended
December 31, 1996, from $22.7 million for the same period in 1995. The HMO
revenue growth was primarily a result of FMC's acquisition during January 1996
of controlling ownership of Broward Managed Care, Inc. (the "Broward
acquisition"), which has Humana affiliated provider agreements ("provider
agreement") to operate and manage two primary care centers in Broward County,
Florida ("Broward"), and new provider agreements, as of September 1996, to
manage a center in New Port Richey, Florida ("New Port Richey") and as of
October 1996, to manage additional centers in Lutz, Florida and South Dale
Mabry, Florida. Revenue related to the Broward, New Port Richey, Lutz, and South
Dale Mabry centers represents $20.3 million or 87% of the increase in HMO
revenue. As discussed in Note 1 of the audited consolidated financial
statements, FMC (through the transaction between MedExec and AMC) has a
management services agreement with three clinics in the CIS. During the year
ended December 31, 1996, revenues generated by this international division
accounted for $6.7 million of the $30.3 million increase discussed above. FMC
intends to finance the growth of the clinics in Eastern Europe primarily with
the capital contribution from GDS. The $30.3 million increase in FMC's revenue
is also net of the decrease resulting from the termination in August 1995 of the
provider agreement to manage the center in Brandon, Florida. The Brandon center
generated $3.5 million in revenue during the year ended December 31, 1995.
MEDICAL EXPENSES. Medical expenses increased $25.1 million, or 136%,
to $43.5 million for the year ended December 31, 1996 from $18.4 million for the
same period in 1995. The majority of the increase ($21.6 million or 86%)
resulted from medical services provided under the Broward, New Port Richey, Lutz
and South Dale Mabry provider agreements. Medical expenses related to the AMC
clinics accounted for $5.4 million or 22% of the increase. The increase in
medical expense is net of the decrease related to the termination of the Brandon
provider agreement in 1995. Medical expenses for Brandon were $3.3 million in
1995. Medical expenses as a percentage of HMO and fee for service revenue
("medical loss ratio") were 84% for the years ended December 31, 1996 and 1995.
OPERATING EXPENSES. Operating expenses increased by $3.1 million, or
89%, to $8.7 million, for the year ended December 31, 1996 from $4.6 million for
the same period in 1995. The increase was primarily due to new employees to
staff the primary care centers in Broward, New Port Richey, Lutz, and South Dale
Mabry and 4.8 million in expenses incurred by FMC in connection with the
development and opening of two international centers. As a percentage of
revenue, however, operating expenses decreased to 15% from 20% for the same
period in 1995.
NET INCOME. Net income for the year ended December 31, 1996 was $.3
compared to a net loss of $(.4) for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO
YEAR ENDED DECEMBER 31, 1994
REVENUE. Revenue increased by 41.4 million, or 7%, to $22.7 million in
1995, from $21.3 million in 1994 due to increased revenue from existing provider
agreements offset by the termination during August 1995 of the provider
agreement to manage the center in Brandon, Florida.
MEDICAL EXPENSES. Medical expenses increased $1.8 million, or 11%, to
$18.4 million in 1995 from $16.6 million in 1994 primarily as a result of an
increase in medical services rendered. The
15
<PAGE>
medical loss ratio was 81% for the year ended December 31, 1995 compared to 78%
for the year ended December 31, 1994.
OPERATING EXPENSES. Operating expenses increased $1.2 million, or 35%,
to $4.6 million in 1995 from $3.4 million in 1994 due mainly to the additional
$1.1 million of expenses incurred by FMC during 1995. These expenses relate
primarily to additional compensation to former officers of FMC under employment
agreements, development cost incurred relating to the Chicago market, reprising
adjustments
from Humana related to previous years and legal and professional fees incurred
in connection with a proposed merger with another company. Humana from time to
time renegotiates certain contracts, which results in retroactive adjustments to
the financial statements. In 1995, Humana renegotiated certain hospital
contracts in the Tampa market retroactive to the beginning of 1994. As a result,
hospitals rebilled FMC for previously billed claims in order to recover
additional funds from FMC for 1994 and 1995. The ongoing impact, as with any
price increase is higher medical costs. The repricing is noted because 1995 in
effect included two years of price increases instead of one. As per FAS No. 5,
FMC records retroactive adjustments when they are probable and estimable. As a
percentage of revenue, operating expenses for the year ended December 31, 1995
increased to 20% from 16% for the year ended December 31, 1994.
Net Income (Loss). Net loss for 1995 was $(.4) million compared to net
income in 1994 of $1.4 million, a decrease of $1.8 million, which is primarily
due to the increase in medical services rendered, the write-off of certain
accounts receivables and additional compensation to shareholders under
employment agreements. The accounts receivables which were written-off because
they were uncollectible related to certain management services provided by FMC
totaling $.47 million. The amount was reversed out of revenues where it was
originally recorded during the year rather than written off in operating
expenses as a bad debt. The remaining accounts receivable balances were deemed
to be collectible.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At December 31, 1997, FMG had cash of $1.2 million compared to $63,014
at December 31, 1996. As of December 31, 1997, the unused portion of the $2.5
million credit facility was $210,000. The increase in cash was due to FMG
receiving approximately $4,500,000 as a result of the merger. FMC received $4.5
million dollars from Generale De Sante International, Plc ("GDS") as a result of
an investment GDS made in FMC. To date $3.5 million has been used to fund
development and operating losses of MedExec, Inc., $500,000 was used to pay
professional fees in connection with the merger and the remaining $1.0 million
will be used for general working capital requirements.
FMG had cash of $63,014 at December 31, 1996 compared to $198,763 at
December 31, 1995.
Net cash used in operating activities was ($7.2) million for the year
ended December 31, 1997.
Net cash used in investing activities of approximately $92,000 was
primarily the result of $437,000 in capital expenditures, organizational costs
of $387,000 and the acquisition of Lehigh for $732,000.
Net cash provided by financing activities of $8.3 million was the
result of $285,000 in proceeds received from loans from Humana, $3.8 million in
loans from banks, $4.5 million capital contribution from GDS, less payments of
$341,000 to certain shareholders.
FMG believes that cash from operations, borrowings under existing
credit facilities and asset divestitures will be sufficient to satisfy its
contemplated cash requirements for at least the next twelve months.
To date, FMG's principal uses of cash have been to support its
operating activities. FMG has met its cash requirements in recent years
primarily from its operating activities, advances from Humana and bank
borrowings. FMG believes that funds generated from operations, availability
under its credit facilities, and asset divestitures will be sufficient to
finance its current and anticipated operations and planned capital expenditures
at least through 1998.
FMG's long term capital requirements beyond 1997 will depend on many
factors, including, but not limited to, the rate at which FMG expands its
business. To the extent that the funds generated from the sources described
above are insufficient to fund FMG's activities in the short or long term, FMG
would need
16
<PAGE>
to raise additional funds through public or private financing. No assurance can
be given that additional financing will be available or that, if available, it
will be available on terms favorable to FMG.
As of December 31, 1997, FMG also has a credit facility for $2.5
million bearing interest at 1/2% above prime, of which $500,000 is guaranteed by
certain current and former officers of FMG. The expiration date for the $2.5
million facility is July 31, 1998. FMG also borrowed an additional $537,000 to
purchase Lehigh stock in connection with the merger. FMC purchased this block of
stock to increase its voting power at the Special Shareholders meeting that was
held July 9, 1997, to vote in favor of the Merger. The expiration date for the
$537,000 facility is October 1998.
FMG also maintains a secured line of credit with a domestic bank for
$0.4 million bearing interest at prime. The $0.4 million drawn under this line
of credit at December 31, 1997 has been used by FMG in connection with the
satisfaction of development costs relating to FMG's Midwest operations.
Amortization of $3,333 per month commenced as to the first $200,000 in November
1997 and as to the remaining $200,000, in May 1998.
FMG, is in default in the payment of interest (approximately $785,400
interest was past due as of December 31, 1997) on the $390,000 aggregate
principal amount of its 13 1/25 Senior Subordinated Notes due May 15, 1998 ("13
1/2% Notes") and 14 7/8% Subordinated Debentures due October 15, 1995 ("14 7/8%
Debentures") that remain outstanding and were not surrendered to the Company in
connection with its financial restructuring consummated in 1991. The Company has
been unable to locate the holders of the 13 1/2% Notes and 14 7/8% Debentures
(with the exception of certain of the 14 7/8% Debentures, which were retired
during 1996).
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
asserting performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these new standards. The Company has not
determined whether either of these two standards will have a material impact on
its financial statement disclosure.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations
over the past three years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-62 and page S-1 of this Form 10-K, which are
incorporated herein by reference.
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table set forth below sets forth information with respect to the
directors and executive officers of the Company. Information as to age,
occupation and other directorships has been furnished to the Company by the
individual named. Dennis A. Sokol, Salvatore J. Zizza, Elliot H. Cole and
Richard Berman are currently directors of the Company and will serve as
directors until the next annual meeting of stockholders of the Company (or until
their respective successors are duly elected and qualified or until their
earlier death, resignation or removal).
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE CURRENT POSITION
- --------- --- -----------------------------
Dennis A. Sokol 52 Chairman of the Board, Chief Executive Officer
and Director of the Company and Chairman of
the Board and Chief Executive Officer of FMC
Salvatore J. Zizza 52 Chief Financial Officer, Executive Vice
President, Treasurer and Director of the
Company
Robert A. Bruno 41 Vice President, General Counsel and Secretary
of the Company
Robert H. Glasser 42 Vice President of Finance and Controller
Elliot H. Cole 65 Vice Chairman of the Board and Director of the
Company
Richard Berman 53 Director of the Company
Mr. Sokol has been a director and Chairman of the Board and Chief
Executive Officer of the Company since the Merger, which was consummated on July
9, 1997. Mr. Sokol has served as the Chairman of the Board and Chief Executive
Officer of FMC since its formation in January 1996. Prior to the formation of
FMC, Mr. Sokol served as the Chairman of the Board and Chief Executive Officer
of Hospital Corporation International, Plc., the former international division
of Hospital Corporation of America, Inc., which entity owned and operated
hospitals and primary care facilities in the United Kingdom, Central and Eastern
Europe, the Middle East and Pacific Rim, and American Medical Clinics, Ltd. Mr.
Sokol was the founder, and from 1984 to 1988 served as Chief Executive Officer
of MedServ Corporation, a multifaceted medical service company. Mr. Sokol was
the founder, and from 1989 to 1992 served as the Chief Executive Officer of the
American-Soviet Medical Consortium whose members included Pfizer, Inc.,
Colgate-Palmolive Company, Hewlett-Packard Company, MedServ, Amoco Corporation
and Federal Express Corporation. In all, Mr. Sokol has over thirty years
experience in the medical services industry.
Mr. Zizza has been a director of the Company since 1985 (except that he
did not serve as a director during the period from March 15, 1991 through April
16, 1991) and Executive Vice President and Treasurer since 1997. He was Chairman
of the Board of the Company from April 16, 1991 until the Merger, and was Chief
Executive Officer of the Company from April 16, 1991 through August 22, 1991 and
President of NICO Inc. ("NICO") from 1983 through August 22, 1991. He also
served as President of the Company from October 1985 until April 16, 1991. He is
also a director of the Gabelli Equity Trust, Inc.; The Gabelli Asset Fund; The
Gabelli Growth Fund; The Gabelli Convertible Securities Funds, Inc.; The Gabelli
Global MultiMedia Trust Inc. and Hollis Eden Pharmaceuticals Corp. (a NASDAQ -
listed company). In 1995, Mr. Zizza became Chairman of the Board of The
Bethlehem Corporation (an AMEX company).
Mr. Bruno has served as Vice President and General Counsel of the
Company since May 5, 1993 and as Secretary since August 22, 1994. He served on
the Board from March 31, 1994 until July 9, 1997. He also has served as General
Counsel to NICO and its subsidiaries since June 1983 (except he did not serve as
General Counsel to NICO during the period of January 1, 1992 through May 31,
1993).
19
<PAGE>
Mr. Glasser joined FMC in May 1997 as Corporate Controller. As of July
9, 1997 he was named Vice President Finance of FMG. From October 1995 through
May 1997 Mr. Glasser was a founder and Chief Financial Officer of All Round
Foods, Inc. a sales and marketing company in the food service industry. From
February 1992 to October 1995 Mr. Glasser was a Partner in the Corporate
Recovery Services Group at BDO Seidman LLP. He was a senior manager at KPMG Peat
Marwick LLP in its Corporate Recovery Services Department from May 1988 through
February 1992. Mr. Glasser is a Certified Public Accountant in the states of New
York and Connecticut and is a Certified Insolvency and Reorganization
Accountant.
Mr. Cole has been a director of the Company since July 1997 and has
served as the Co-Vice Chairman of FMC's Board of Directors since its formation
in January 1996. Mr. Cole is a senior partner in the law firm of Patton Boggs
LLP, Washington, D.C., a firm of approximately 250 lawyers. Mr. Cole has
practiced corporation law and been engaged in Federal matters for more than
thirty-five years. Mr. Cole has served as a trustee of Boston University since
1977 as well as being a member of numerous corporate and not-for-profit boards.
Mr. Berman has been a director of the Company since August 1997. Since
1995, Mr. Berman has been the President of Manhattanville College. From 1991 to
1994 he was employed by Howe-Lewis International, initially as President of
North America and subsequently as President and Chief Executive Officer. He also
is a director of HCIA, Inc., Health Insurance Plan of Greater New York, the
Independent College Fund and a member of the Special Advisory Panel on Empire
Blue Cross/Blue Shield and the New York State Council on Health Care and on the
Board of Directors for Lillian Vernon since 1997 (an AMEX company).
No family relationship exists between any of the directors and
executive officers of the Company.
All directors will serve until the annual meeting of stockholders of
the Company to be held in 1998 and until their respective successors are duly
elected and qualified or until their earlier death, resignation or removal.
Officers are elected annually by the Board of Directors and serve at the
discretion thereof.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation awarded to,
earned by or paid to the Chief Executive Officer and the other most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 for services rendered in all capacities to the Company
during each of the years ended December 31, 1997, December 31, 1996 and December
31, 1995:
20
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
ANNUAL COMPENSATION AWARDS
Securities
Underlying
Options
Other Annual (Number of All Other
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) SHARES) COMPENSATION (2)
- --------------------------- ---- ------ ----- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore J. Zizza (3) 1997 $200,000 0 0 0 $1,288
1996 $200,000 0 0 0 $1,272
1995 $200,000 0 0 0 $1,272
Dennis Sokol (4) (6) 1997 $296,800 0 0 0 $57,980
1996 $267,200 0 0 0 $29,790
1995 $250,000 0 0 0 $0
Kenneth Burkhart (6) 1997 $172,763 0 0 0 $0
1996 0 0 0 0 $0
1995 0 0 0 0 $0
Shannon Slusher (7) 1997 $125,000 0 0 0 $33,000 (8)
1996 $80,000 0 0 0 $35,000 (8)
1995 $90,000 0 0 0 $35,000 (8)
Vladimir Checklin (7) 1997 $150,000 0 0 0 $12,000 (9)
1996 0 0 0 0 $0
1995 0 0 0 0 $0
Michael Cavanaugh (5) (6) 1997 $236,114 0 0 0 $0
1996 $236,725 0 0 0 $0
1995 $242,695 0 0 0 $0
Stuart Kaufman (5) (6) 1997 0 0 0 0 $0
1996 $110,800 0 0 0 $0
1995 $199,952 0 0 0 $0
Stephanie Schmidt (5) (6) 1997 0 0 0 0 $0
1996 $140,421 0 0 0 $0
1995 $150,000 0 0 0 $0
Mark Kugler (5) (6) 1997 0 0 0 0 $0
1996 $205,785 0 0 0 $0
1995 $206,329 0 0 0 $0
Mel Levinson (5) (6) 1997 0 0 0 0 $0
1996 $116,997 0 0 0 $0
1995 $200,924 0 0 0 $0
Asif Jamal (5) (6) 1997 0 0 0 0 $0
1996 $84,818 0 0 0 $0
1995 $150,000 0 0 0 $0
Jeff Fine (5) (6) 1997 0 0 0 0 $0
1996 $110,800 0 0 0 $0
1995 $200,924 0 0 0 $0
</TABLE>
<PAGE>
(1) As to each individual named, the aggregate amount of personal benefits
not included in the Summary Compensation Table does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported
for the named executive officer.
(2) Represents premiums paid by the Company with respect to term life
insurance for the benefit of the named executive officer or the
Company.
(3) Until the Merger, Mr. Zizza was Chairman of the Board, President and
Chief Executive Officer of the Company and at present he is the
Executive Vice President and Treasurer. On August 22, 1994, the Company
and Mr. Zizza entered into an employment agreement. Mr. Zizza and the
Company amended the terms of Mr. Zizza's employment agreement effective
as of the time of Merger. In general, as amended, the employment
agreement provides for his employment through December 31, 2000 at an
annual salary of $200,000 (subject to increase, at the discretion of
the Board of Directors, if the Company acquires one or more new
businesses, to a level commensurate with the compensation paid to the
top executives of comparable businesses). In addition, Mr. Zizza may be
entitled to a bonus, at the discretion of the Company.
(4) During 1995 these individuals were employed by American Medical
Clinics, Inc.
(5) During 1995 these individuals were employed by MedExec Inc.
(6) During 1996 and 1997 these individuals were employed by FMC as a result
of the reorganization among MedExec Inc., American Medical Clinics,
Inc. and FMC.
(7) These individuals were employed by American Medical Clinics, Inc.
(8) Represents a housing allowance of $30,000, $30,000 and $25,000 for
1995, 1996 and 1997 respectively. Also represented is a travel
allowance of $5,000, $5,000 and $8,000 for 1995, 1996 and 1997
respectively.
(9) Represents a housing allowance.
Dividends paid to shareholders of American Medical Clinics, Inc., MedExec Inc.
and FMC have not been included.
COMPENSATION OF DIRECTORS
Prior to the Merger, the Company's directors received no compensation
for serving on the Board of Directors other than the reimbursement of reasonable
expenses incurred in attending meetings. Since the consummation of the Merger,
executive directors have continued to receive no compensation; however, each
non-executive director now is entitled to receive annually shares of Common
Stock with a fair market value of $10,000 (pro-rated in 1997 to reflect the
portion of the year following the Merger): The non-executive directors had not
received any shares for 1997. In April 1996, Lehigh granted options to purchase
15,000 shares of Common Stock at an exercise price of $.50 per share to a former
non-executive officer director and options to purchase 10,000 shares of Common
Stock at an exercise price of $.50 per share to three former non-executive
officer directors, two of whom were members of the Compensation Committee. The
options granted in 1996 do not give effect to the November 1997 reverse split.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation and By-laws of the Company contain
provisions permitted by the Delaware General Corporation Law (under which the
Company is organized), that, in essence, provide that directors and officers
shall be indemnified for all losses that may be incurred by them in connection
with any claim or legal action in which they may become involved by reason of
their service as a director or officer of the Company if they meet certain
22
<PAGE>
specified conditions. In addition, the Certificate of Incorporation of the
Company contains provisions that limit the monetary liability of directors of
the Company for certain breaches of their fiduciary duty of care and provide for
the advancement by the Company to directors and officers of expenses incurred by
them in defending suits arising out of their service as such.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
OPTIONS
No options were granted during 1997 to the executive officers of the
Company named in the Summary Compensation Table or to other employees of the
Company. However, four former non-executive officer directors were granted stock
options in 1996. See "Compensation of Directors". In July 1997, the Board of
Directors established a Stock Option Plan (the "Stock Option Plan") and the
Incentive Compensation Plan (the "Incentive Compensation Plan").
No options were exercised by the executive officers of the Company
named in the Summary Compensation Table during the fiscal year ended December
31, 1997. The following table sets forth the number and dollar value of options
held by such persons on December 31, 1997, none of which were "in the money" at
December 31, 1997.
AGGREGATED OPTION EXERCISES IN
1997 AND YEAR-END OPTIONS
Number of Unexercised Options and Warrants at
Year-End
- --------------------------------------------------------------------------------
NAME Exercisable Unexercisable
- --------- --------------- ------------------
Salvatore Zizza 281,919
Robert Bruno 8,333
THE STOCK OPTION PLAN
The purpose of the Stock Option Plan is to advance the Company's
interests by providing additional incentive to attract and retain in the employ
of the Company and its subsidiaries, qualified and competent persons to provide
management services, to encourage the sense of proprietorship and to stimulate
the active interest of such persons in the development and financial success of
the Company and its subsidiaries. The Stock Option Plan provides for the grant
of incentive stock options and nonqualified stock options within the meaning of
Section 422 of the Internal revenue Code of 1986, as amended (the "Code"), as
well as stock appreciation rights ("Rights") with respect to stock options and
restricted stock ("Restricted Stock") awards.
The Stock Option Plan, which is administered by the Compensation
Committee of the Board of Directors (but can also be administered directly by
the Board of Directors), currently authorizes the issuance of a maximum of
500,000 shares of Common Stock (on a post Reverse Split basis), which may be
newly issued shares or previously issued shares held by any subsidiary of the
Company. If any award under the Stock Option Plan terminates, expires
unexercised or is cancelled, the shares of Common Stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards
The purchase price of each share of Common Stock purchasable under an
incentive option granted under the Stock Option Plan is to be determined by the
Compensation Committee at the time of grant, but is to not be less than 100% of
the fair market value of a share of Common Stock on the date the option is
granted; PROVIDED, HOWEVER, that with respect to an optionee who, at the time
such incentive option is granted, owns more than 10% of the total combined
voting power of all classes of stock of the Company or of any of its
subsidiaries, the purchase price per share is to be at least 110% of the fair
market value per share
23
<PAGE>
on the date of grant. The term of each option is to be
fixed by the Compensation Committee, but no option is to be exercisable more
than five years after the date such option is granted.
The aggregate fair market value, determined as of the date the
incentive option is granted, of shares of Common Stock for which incentive
options are exercisable for the first time to any optionee during any calendar
year under the Stock Option Plan (and/or any other stock options plans of the
Company or any of its subsidiaries) shall not exceed $100,000. The aggregate
number of shares of Common Stock subject to options granted under the Stock
Option Plan granted during any calendar year to any one director is not to
exceed that number of shares as equals ten percent of the outstanding shares of
the Company for which options may be granted under the Stock Option Plan.
The Compensation Committee shall have the authority to grant Rights
with respect to all or some of the shares of Common Stock covered by any option,
which Rights may be granted together with or subsequent to the grant of the
option. Rights entitle the holder to cash equal to the difference between an
Offer Price Per Share (as defined in the Stock Option Plan) and the exercise
price of the related option if shares of Stock representing 20 percent or more
of the aggregate votes of the Stock voting together as a single class. If a
Right is exercised, the related Option is terminated, and if an option
terminates or is exercised, the corresponding Right terminates.
In addition, the Compensation Committee shall have the authority to
award Restricted Stock which entitles the recipient to acquire, at no cost or
for a purchase price determined by the Compensation Committee, shares of Common
Stock subject to such restrictions and conditions as the Compensation Committee
may determine at the time of grant. Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. A recipient of Restricted Stock shall have the rights of a
stockholder with respect to the voting of the Restricted Stock, subject to such
other conditions contained in the written instrument evidencing the Restricted
Stock. However, generally Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and, generally,
upon the termination of the recipient's employment with the Company, the Company
shall have the right, at the discretion of the Compensation Committee, to
repurchase such Restricted Stock at its purchase price. Nonetheless, once the
pre-established performance goals, objectives and other conditions have been
attained, such shares of Restricted Stock shall no longer be Restricted Stock
and shall be deemed "vested" and will be freely transferable.
The Board of Directors may amend, suspend or terminate the Stock Option
Plan, except that no amendment may be adopted that would impair the rights of
any optionee without his consent. Further, no amendment may be adopted which,
without the approval of the stockholders of the Company, would (i) materially
increase the number of shares issuable under the Stock Option Plan, except as
provided in itself, (ii) materially increase the benefits accruing to optionees
under the Stock Option Plan, (iii) materially modify the eligibility
requirements for participation in the Stock Option Plan, (iv) decrease the
exercise price of an incentive option to less than 100% of the fair market value
per share of Common Stock on the date of grant or the exercise price of a
nonqualified option to less than 80% of the fair market value per share of
Common Stock on the date of grant, or (v) extend the term of any option beyond
that provided for in the Stock Option Plan.
The Compensation Committee may amend the terms of any option previously
granted, prospectively or retroactively, but no such amendment may impair the
rights of any option without his consent. The Compensation Committee may also
substitute new options for previously granted options, including options granted
under other plans applicable to the participant and previously granted options
having higher option prices, upon such terms as it may deem appropriate.
The number of shares of Common Stock available under the Stock Option
Plan and the terms of any option or other award granted thereunder are subject
to adjustment in the event of a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the shares of Common Stock, if the Compensation Committee determines
that such event equitably requires such an adjustment.
As of March 1, 1998, there were no options outstanding under the Stock
Option Plan and no Restricted Stock had been awarded.
24
<PAGE>
INCENTIVE COMPENSATION PLAN
The purpose of the Incentive Compensation Plan is to advance the
Company's interests by providing additional incentives to those key employees of
the Company who contribute the most to the growth and profitability of the
Company and to encourage such key employees to continue as employees by making
their compensation competitive with compensation opportunities in competing
businesses and industries.
The Incentive Compensation Plan, which is administered by the
Compensation Committee of the Board of Directors (but can also be administered
directly by the Board of Directors), authorizes the Compensation Committee to
determine by March 15 of each year which key employees will be eligible in such
year for incentive compensation pursuant to the Incentive Compensation Plan (the
"Participants") and to establish targets for such fiscal year for the Company's
earnings per share. If the targets are achieved then each Participant will
receive (i) a cash bonus equal to 10% of his base salary for such year, (ii) an
amount of Common Stock (the "Stock Bonus") determined by dividing 30% of his
base salary by (50%) of the average of the high and low closing prices for the
Common Stock during such year (or, if lower, 50% of the closing sales price on
the last trading day of such year), and (iii) a cash payment sufficient to
satisfy such participant's income tax liability with respect to his Stock Bonus.
There is no maximum number of shares of Common Stock, which may be awarded under
the Incentive Compensation Plan.
The Compensation Committee may amend the Incentive Compensation Plan,
except that no amendment may be adopted that would impair the rights of any
Participant with respect to the year in which such amendment had been adopted.
The Plan shall terminate on December 31, 2002 except for the delivery
of shares of Common Stock and/or cash due to Participants with respect to such
year.
If, prior to the end of any Fiscal Year, a Participant's employment
terminates on account of (i) death, (ii) retirement, (iii) total and permanent
disability, or (iv) the Company's termination of the Participant without cause,
the Participant will nonetheless remain eligible to receive amounts under the
Incentive Compensation Plan for such year if the Participant shall have been an
active, full-time employee for a period of at least two years preceding such
termination. In all other cases, the Participant will be ineligible.
No bonuses or stock have been awarded under the Incentive Compensation
Plan.
BOARD REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for developing the Company's
executive compensation policies, determining the compensation paid to the
Company's Chief Executive Officer and its other executive officers and
administering the Stock Option Plan and the Incentive Compensation Plan. The
Compensation Committee did not meet in 1996 since all executives were paid
pursuant to previously executed employment agreements and the report is the
report of the entire Board of Directors.
The Compensation Committee did not meet in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until the meeting on July 9, 1997 at which the current Board of
Directors were elected, Anthony Amhurst and Charles Gargano were members of the
Compensation Committee and were directors. Currently, Mr. Cole is the only
member of the Compensation Committee and is a director. There are no
Compensation Committee interlock relationships to be disclosed pursuant to Item
402 of Registration S-K.
25
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Stock of the Company with the cumulative total return on the NYSE Market
Index and MG Group Index (assuming the investment of $100 in the Company's
Common Stock, the NYSE Market Index and MG Group Index on January 1, 1992, and
reinvestment of all dividends).
- - - - - - - - - - - - FISCAL YEAR ENDING - - - - - - - - - -
<TABLE>
COMPANY 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
FIRST MEDICAL GROUP INC 100 72.22 61.11 25.01 25.01 111.14
INDUSTRY INDEX 100 115.50 128.20 160.45 159.58 164.64
BROAD MARKET 100 119.95 125.94 163.35 202.99 248.30
</TABLE>
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information on March 12, 1998 (except as
otherwise noted below) with respect to each person (including any "group", as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) known to the Company to be the beneficial owner of more than 5% of the
Common Stock.
Name of Address Amount and Nature of Percent
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
------------------- ------------------------ --------
General De Sante 2,047,860 21.79%
International PLC
4 Cornwall Terrace
London, NW 1 4QP
England
SAJH Partners 1,595,021(2) 16.93%
1055 Washington Bvld.
Stamford, CT 06901
Dennis A. Sokol 482,644 5.14%
1055 Washington Blvd.
Stamford, CT 06901
(1) Except as otherwise indicated, each of the person listed above has sole
voting and investment power with respect to all shares shown in the
table as beneficially owned by such person.
(2) Dennis Sokol is the Managing Partner of SAJH Partners and has a 1%
partnership interest in the partnership and consequently could be
deemed under Rule 13D-3 of the Exchange Act to have beneficial
ownership of such shares. Mr. Sokol disclaims ownership of all such
shares other than as a result of his 1% partnership interest.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Common Stock beneficially
owned on March 12, 1998 by (i) each director of the Company, (ii) each of the
executive officers named in the Summary Compensation Table set forth above and
(iii) all directors and executive officers of the Company as a group.
Amount and Nature of
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
------------------------ ------------------------ ----------------
Dennis A. Sokol (2) 482,644 5.14
Salvatore J. Zizza (3) 290,436 3.00
Elliot H. Cole 321,165 3.32
Richard Berman 0 -------
Robert A. Bruno (4) 10,423 *
Robert H. Glasser 0 -------
All executive officers
and directors as a group.
(6 persons) 1,104,668 11.46
27
<PAGE>
* Less than 1%
(1) Except as otherwise indicated, each person listed above has sole voting and
investment power with respect to all shares shown in the table.
(2) See note 2 of the table under the caption "Security Ownership of Certain
Beneficial Owners" above.
(3) Includes 281,919 options to purchase common stock at $.875 per share.
(4) Includes 8,333 options to purchase common stock at $.875 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FMC and Generale de Sante International, Plc ("GDS") were parties to a
Subscription Agreement, dated June 11, 1996 pursuant to which GDS paid
$5,000,000 in order to acquire a variety of ownership interests in FMC and its
subsidiaries, including (i) 10% of the outstanding shares of FMC's common stock
(the "FMC Common Stock"), each share of which was automatically exchanged
pursuant to the Merger for 1,127.675 shares of Common Stock and 103.7461 shares
of Preferred Stock, and (ii) shares of FMC's 9% Series A Convertible Preferred
Stock (the "FMC Preferred Stock") convertible into 10% of the shares of FMC
Common Stock, which shares of FMC Preferred Stock were converted following the
Merger. Consequently, when GDS converted its shares of FMC Preferred Stock, GDS
received shares of Lehigh Common Stock and Lehigh Preferred Stock. Together,
with the shares issued for the FMC Common Stock, these shares would give GDS a
total of approximately 21.79% ownership interest and voting power of the
Company. See "Security Ownership of Certain Beneficial Owners of the Company."
For information regarding the employment arrangements and options of
Mr. Zizza, see note 3 to the Summary Compensation Table and note 3 to the table
regarding Security Ownership of Certain Beneficial Owners of the Company. Mr.
Zizza and the Company have entered into negotiations for the purchase of
Hallmark Electrical Supplies Corporation.
Mr. Bruno has an employment agreement with the Company that expires
December 31, 2000 at an annual salary of $120,000. For information regarding Mr.
Bruno's options see note 4 to the table regarding security ownership of certain
beneficial owners of the Company.
On January 1, 1996, FMC and Dr. Levinson, who was a director of the
Company, entered into an agreement for the period commencing January 1, 1996 and
terminating December 31, 1998 and providing for a payment of $100,000 (subject
to increase in accordance with the consumer price index) annually during the
period. Dr. Levinson's contract was not terminated as a result of the Merger.
Dr. Levinson resigned as a director of the Company on February 5, 1998.
FMC and Dennis A. Sokol, the Chairman of the Board, Chief Executive
Officer and Director of the Company and Chairman of the Board and Chief
Executive Officer of FMC, have an oral agreement whereby FMC has agreed to pay
Mr. Sokol an annual salary of $300,000 per year for his services as FMC's
Chairman of the Board and Chief Executive Officer. At the discretion of the
Compensation Committee of the Board of FMC, Mr. Sokol may be awarded an annual
bonus. Mr. Sokol is also a shareholder of American Medical Clinics, which is a
plaintiff in the following lawsuit:
HOSPITAL CORPORATION INTERNATIONAL, LTD. AND AMERICAN MEDICAL CENTERS, INC. VS.
PEPSICO INC., CASE NUMBER 94CVS 888 SUPERIOR COURT, CRAVEN COUNTY, NORTH
CAROLINA
On January 1, 1996, American Medical Clinics ("AMC") shareholders and
MedExec shareholders entered into a Reorganization Agreement to form First
Medical Corporation ("FMC"). As part of the
28
<PAGE>
Agreement, the AMC shareholders did not assign its interest to include any
recovery from the Litigation other than as stated below.
In this lawsuit instituted by Hospital Corporation International, Ltd.
and American Medical Centers Inc. against Pepsico Inc., and certain other
parties about which AMC has fully informed the FMC (the "Litigation"), FMC
agreed to pay the ongoing legal fees and other expenses connected with the
Litigation. If the Litigation is settled or otherwise brought to a successful
conclusion, the proceeds of such settlement or other successful conclusion of
the Litigation (the "Proceeds") will be shared as follows: (a) AMC and FMC will
first be reimbursed in full for their respective legal fees and expenses
incurred in connection with the Litigation (the "Fees") or a pro rata share of
the Fees incurred by each of them if the Proceeds are insufficient to reimburse
AMC and FMC for the Fees in full; and (b) the balance of the Proceeds will be
shared on a proportionate basis between FMC and the former shareholders of AMC.
The portion to be paid to FMC shall be a fraction, the numerator of which will
be the amount of the Fees paid by FMC and the denominator of which will be the
net Proceeds remaining after the reimbursement of the fees pursuant to
subparagraph (a) above. The former shareholders of AMC will receive the balance
of the Proceeds.
The Company and Elliot H. Cole, the Vice Chairman of the Board and
Director of the Company, have an oral agreement whereby the Company has agreed
to pay Mr. Cole a consulting fee of $60,000 per year for his services as the
Company's Vice Chairman of the Board. Mr. Cole is a member of the law firm
Patton Boggs, L.L.P. which renders legal services to the Company and is
representing the Plaintiff in the aforemention Litigation discussed in this Item
13.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
a. (1) FINANCIAL STATEMENTS
<S> <C> <C>
The following financial statements are Included in Part II,
Item 8 of this Annual Report on Form 10-K:
The First Medical Group, Inc. ("FMG")
Report of Independent Public
Accountants as of December 31, 1997 F-2
Consolidated Balance Sheet, December
31, 1997 F-3
Consolidated Statement of Operations,
Year Ended December 31, 1997 F-4
Consolidated Statement of Changes in
Shareholders' Equity (Deficit), Year
Ended December 31, 1997 F-5
Consolidated Statement of Cash Flows,
Year Ended December 31, 1997 F-6
Notes to Consolidated Financial
Statements. F-7 - F-20
First Medical Corporation
Independent Auditors' Report F-21
Consolidated Balance Sheet - December 31, 1996 F-22
Consolidated Statement of Income for the Year Ended
December 31, 1996 F-23
Consolidated Statement of Stockholder's Equity for the Year
Ended December 31, 1996 F-24
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996 F-25 to F-26
Notes to Consolidated Financial Statements F-27 to F-41
MedExec, Inc. and Subsidiaries; SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.:
Independent Auditor's Report F-42
Combined Balance Sheets - December 31, 1995 and 1994 F-43
Combined Statements of Operations for Each of The Years in The
Three-Year Period Ended December 31, 1995 F-44
Combined Statements of Stockholder's Equity For Each of The
Years in The Three-Year Period Ended December 31, 1995 F-45
Combined Statements of Cash Flows for Each of The Years
in The Three-Year Period Ended December 31, 1995 F-46
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Notes to Combined Financial Statements F-47 to F-62
a. (2) SCHEDULE
The following schedule for the Years F-20 Ended December 31,
1997 and 1996 are submitted herewith:
Schedule II - Valuation and Qualifying
Accounts S-1
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
a. (3) EXHIBITS
The Exhibits to this Annual Report on Form 10-K are listed in
the Exhibit Index annexed hereto and incorporated by
reference.
(b) REPORTS ON FORM 8-K
There was no Form 8-K filed during the last quarter covered
by this report.
</TABLE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
First Medical Group, Inc.
By: /s/ Dennis A. Sokol
----------------------
Dennis A. Sokol
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ Dennis A. Sokol Chairman of the Board of Directors, April 15, 1998
- --------------------- President and Chief Executive Officer
Dennis A. Sokol
/S/ Salvatore J. Zizza Director and Chief Financial Officer April 15, 1998
- ---------------------
Salvatore J. Zizza
/S/ Elliot H. Cole Director and Vice Chairman April 15, 1998
- --------------------- of the Board
Elliot H. Cole
/S/ Richard Berman Director April 15, 1998
- ---------------------
Richard Berman
/S/ Robert H. Glasser Controller April 15, 1998
- ---------------------
Robert H. Glasser
</TABLE>
INDEX TO FINANCIAL STATEMENTS
AND SUMPLEMENTARY DATA
Page
First Medical Group, Inc. ("FMG") F-2
Report of Independent Certified Public Accountants as of
December 31, 1997
Consolidated Balance Sheet, December 31, 1997 F-3
Consolidated Statement of Operations, Year Ended F-4
December 31, 1997
Consolidated Statement of Changes in Shareholders' F-5
(Deficit) Year Ended December 31, 1997
Consolidated Statement of Cash Flows, Year Ended F-6
December 31, 1997
Notes to Consolidated Financial Statements F-7 to F-20
First Medical Corporation
Independent Auditors' Report F-21
Consolidated Balance Sheet - December 31, 1996 F-22
Consolidated Statement of Income for the Year Ended
December 31, 1996 F-23
Consolidated Statement of Stockholder's Equity for the Year
Ended December 31, 1996 F-24
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996 F-25 to F-26
Notes to Consolidated Financial Statements F-27 to F-41
MedExec, Inc. and Subsidiaries; SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.:
Independent Auditor's Report F-42
Combined Balance Sheets - December 31, 1995 and 1994 F-43
Combined Statements of Operations for Each of The Years in The
Three-Year Period Ended December 31, 1995 F-44
Combined Statements of Stockholder's Equity For Each of The
Years in The Three-Year Period Ended December 31, 1995 F-45
Combined Statements of Cash Flows for Each of The Years
in The Three-Year Period Ended December 31, 1995 F-46
Notes to Combined Financial Statements F-47 to F-62
Schedule, Years Ended December 31, 1997 and 1996
II - Valuation and Qualifying Accounts S-1
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.
F-1
<PAGE>
Independent Auditor's Report
The Board of Directors
First Medical Corporation
We have audited the accompanying consolidated balance sheet of First Medical
Corporation as of December 31, 1996 and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Medical Corporation as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
March 25, 1997, except as to
note 2(m) which is as of November 12, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
First Medical Group, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheet of First Medical
Group, Inc. as of December 31, 1997, and the related consolidated statement of
operations, shareholder's deficit and cash flows for the year then ended.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in note 14, the Company has entered into two separate agreements to
sell certain medical operations, as well as its "HallMark" subsidiary. The total
revenues of the Companies being divested account for approximately 74% of the
total consolidated revenues of the Company for the year ended December 31, 1997.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Medical Group,
Inc. at December 31, 1997, and the consolidated results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
New York, New York
BDO Seidman, LLP
March 27, 1998, except for Note 14
which is as of April 14, 1998
F-2
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS 1997
------------
Current assets:
Cash and cash equivalents $ 1,151,416
Humana IBNR receivable and claims reserve fund 8,953,707
Other receivables, net of allowance for doubtful accounts
of $1,015,287 7,620,638
Due from related parties 1,139,760
Inventories 1,963,859
Prepaid expenses and other current assets 266,813
------------
Total current assets 21,096,193
Property and equipment, net 732,917
Intangible assets,net 5,361,616
Other assets 354,659
------------
$ 27,545,385
============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 4,601,993
Accrued expenses 4,610,078
Accrued medical claims, including IBNR 8,189,829
Corporate deposits 731,372
Loans payable to Humana, current maturities 366,489
Loans payable to banks, current maturities 3,457,812
Obligations to certain shareholders, current maturities 548,267
------------
Total current liabilities 22,505,840
Loans payable to Humana, net of current maturities 293,141
Loans payable to banks, net of current maturites 5,133,042
Obligations to certain shareholders, net of current maturiites 667,083
Commitments and contingencies
Shareholders' deficit:
Capital stock,par value $.001;authorized shares 100,000,000
shares issued 9,397,292 9,397
Additional paid in capital 8,083,488
Retained deficit (9,146,606)
------------
Total shareholders' deficit (1,053,721)
------------
$ 27,545,385
============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
December
31, 1997
Revenues:
Capitated revenue - Humana $ 58,234,005
Fee for service and related revenue 12,849,421
Other revenue 8,391,632
------------
Total revenue 79,475,058
Medical expenses 65,512,662
Cost of sales 5,925,503
Total cost of services and sales 71,438,165
------------
Gross margin 8,036,893
Operating expenses:
Salaries and related benefits 3,841,911
General and administrative 7,169,363
Impairment loss on intangibles 3,959,551
Depreciation and amortization 1,031,337
------------
Operating loss (7,965,269)
Interest expense, net 576,379
Loss before income tax benefit and cumulative effect
of a change in accounting principle (8,541,649)
Income tax benefit
(62,736)
Net loss before cumulative effect of a change
in accounting principle $ 8,478,913
Cumulative effect of a change in
accounting principle (991,405)
Net loss $ (9,470,318)
============
Loss per share - basic and diluted
Loss before cumulative effect of a change in accounting
principle $ (.92)
Cumulative effect of change in accounting principle (.11)
------------
Net loss $ (1.03)
Weighted average number of common shares
outstanding 9,202,117
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Shareholders'
Stock capital (Deficit) (Deficit)Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 100 $ 379,685 $ 323,712 $ 703,497
Merger with Lehigh (recapitalization) 9,297 2,538,803 -- 2,548,100
Capital contribution from GDS -- 5,000,000 -- 5,000,000
Capital contribution to AMCD -- 165,000 -- 165,000
Net loss -- -- (9,470,318) (9,470,318)
----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 9,397 $ 8,083,488 $(9,146,606) $(1,053,721)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flow from operating activities:
Net income $ (9,470,318)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,031,337
Deferred income tax liability, net (112,500)
Impairment loss from intangibles 3,959,551
Cumulative effect of a change in accounting principles 991,405
(Increase) decrease in assets, net of acquisitions:
Humana IBNR receivable and claims reserve fund (715,373)
Other receivables (1,921,513)
Due from related parties, net (1,300,980)
Inventories 17,269
Prepaid expenses and other current assets (318,859)
Intangibles and other assets (2,746,309)
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable and other accrued expenses 2,680,130
Accrued medical claims, including IBNR 1,106,122
Corporate deposits (75,104)
Taxes payable (300,000)
------------
Net cash used in operating activities (7,175,142)
------------
Cash flows used in investing activities:
Capital expenditures (436,600)
Organizational costs (386,975)
Acquisition of Lehigh, net of cash acquired 731,667
------------
Net cash used in investing activities (91,908)
------------
Cash flow provided from financing activities:
Proceeds from loan payable Humana 369,978
Proceeds from loans payable to banks 13,882,098
Repayment of loan payable Humana (85,348)
Repayments of loans payable to banks (10,025,277)
Proceeds from payable to stockholders 136,597
Payment of obligations to stockholders (477,111)
Capital contribution from GDS 4,511,512
------------
Net cash provided by financing activities 8,312,449
------------
Increase in cash and cash equivalents 1,045,398
Cash and cash equivalents, beginning of the year 63,014
Cash and cash equivalents for Durham, beginning of the year 43,004
------------
Cash and cash equivalents end of period $ 1,151,416
============
See accompanying notes to consolidated financial statements
F-6
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND OPERATION.
First Medical Group, Inc. ("FMG" or the "Company") is primarily an international
provider of management, consulting and financial services to physicians and
other health care delivery organizations and facilities. FMG's operations are
conducted through three divisions: (a) a physician practice management division
which provides physician management services including the operation of clinical
facilities and management services to medical groups, (b) an international
division which manages medical centers in Eastern Europe and the Commonwealth of
Independent States (the former Soviet Union) ("CIS"), and through its merger
with Lehigh (see below), (c) a distributor of electrical supplies for the
construction industry.
The consolidated financial statements include the accounts of FMG and its
majority owned subsidiaries: MedExec, Inc. and subsidiaries ("MedExec");
American Medical Clinics Management Company, Inc. ("AMCMC"); American Medical
Clinics Development Corporation, Limited ("AMCD"); FMC Healthcare Services, Inc.
("FMC-HS") and Hallmark Electrical Supplies Corporation ("Hallmark"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
On July 9, 1997, the stockholders of Lehigh approved the merger (the "Merger")
pursuant to the terms of the Agreement and Plan of Merger dated October 29, 1996
(the "Merger Agreement") among The Lehigh Group Inc. ("Lehigh"), First Medical
Corporation ("FMC") and Lehigh Management Corp., a wholly owned subsidiary of
Lehigh ("Merger Sub"). On the same day, Merger Sub was merged with and into FMC.
As a result of such merger, legally FMC became a wholly owned subsidiary of the
Company. However, the financial statements presented reflect First Medical
Corporation's acquisition of Lehigh since the acquisition date of July 9, 1997.
Although legally The Lehigh Group acquired First Medical Corporation, for
accounting purposes First Medical Corporation is considered the accounting
acquirer (i.e., the reverse acquisition), since the former owners of FMC
acquired 96% of the stock of the Company. Therefore, the operating results of
Lehigh are included in the statement of operations since the acquisition date
(July 9, 1997) and the December 31, 1997 balance sheet reflects the effect of
the acquisition of Lehigh.
MedExec, Inc. ("MedExec") was incorporated on March 14, 1991.
On January 1, 1996 MedExec and American Medical Clinics ("AMC") entered into a
transaction which consisted of the following:
o AMC and MedExec incorporated FMC;
o All of the outstanding shares of MedExec and AMC were converted into
shares of FMC;
o The shareholders of MedExec and AMC received 48% and 52% of the shares of
FMC, respectively;
o 100% of the AMC shares were distributed to the shareholders of FMC
(former shareholders of MedExec received 48% of the distributed shares of
AMC);
o In connection with the above transaction, FMC entered into separate
employment contracts with three executives of MedExec whereby the
respective executives are guaranteed payments regardless of any services
rendered. The agreements are for a three-year period and when the
contracts expire they include an additional two-year covenant not to
compete. The employment /non-compete agreements have been classified as
intangible assets in the financial statements and are being amortized
over five years. (See Note 5).
The above transaction was accounted for under the purchase method of accounting
with MedExec being deemed the accounting acquirer despite the fact that AMC
received 52% of the shares of FMC. This result was reached due to, among other
factors, the fact that immediately after this transaction, the FMC Board of
F-7
<PAGE>
Directors was comprised of four former shareholders of MedExec and three former
shareholders of AMC and the fact that MedExec constituted the larger share of
operations. Because of the short term monetary nature of AMC's assets and
liabilities, historical book values constituted fair value on the transaction
date resulting in no purchase price adjustments under Accounting Principles
Board Opinion No. 16.
On January 2, 1996, AMCMC, a newly formed subsidiary of FMC, acquired from AMC a
membership list (contracts to provide medical services to customers) and assumed
certain liabilities of AMC. The transaction was accounted for under the purchase
method of accounting because, in essence, the purchase of the membership list
represented the acquisition. AMCMC acquired the income stream of an operating
enterprise. Goodwill was recorded in the amount of $1,020,275 related to this
transaction.
AMCMC, a wholly-owned subsidiary of the Company, has entered into a management
services agreement with the AMC clinics located in the CIS, whereby the AMC
clinics provide medical services to AMCMC customers (See Note 8). AMCMC collects
all of the revenues directly from its members, which it is legally entitled to
collect. AMCMC also pays all of AMC's expenses, including but not limited to the
salaries of the physicians, which it is legally obligated to pay.
On January 20, 1996, the Company entered into an agreement with Generale de
Sante International, Plc ("GDS") to form AMCD, an Irish Company. AMCD was
established to develop and operate medical clinics throughout the world with the
exception of within the CIS. On July 9, 1997, GDS, as stipulated in the
agreement, contributed $5,000,000 in capital (less approximately $489,000 FMG
owed to GDSI) in exchange for 2,047,860 shares of the Company's common stock.
The Company through its FMC-Texas subsidiary manages a multi specialty physician
practice in Texas pursuant to a management agreement entered into in February
1996. Pursuant to Emerging Issues Task Force No. 97-2, effective January 1,
1997, the Company consolidated this practice. The operations of this practice
are included in the statement of operations of the Company for the year ended
December 31, 1997. The cumulative effect of the change in the accounting
principle is reported in the statement of operations for the year ended December
31, 1997.
(A) PHYSICIAN PRACTICE MANAGEMENT DIVISION-MEDEXEC
The Company's physician practice management operations are currently conducted
through MedExec. MedExec functions in two capacities as a management services
organization: (i) owning and operating twelve primary care centers (located in
Florida and Indiana) which have full risk contracts for primary care and Part B
services and partial risk (50%) for Part A services, and (ii) managing eleven
multi-specialty groups (located in Florida and Texas) with fee-for-service and
full risk contracts for primary care and Part B services and partial risk (50%)
for Part A services. Full risk contracts are contracts with managed care
companies where FMC assumes essentially all responsibility for a managed care
member's medical costs and partial risk contracts are contracts where FMC
assumes partial responsibility for a managed care member's medical costs.
Ownership and operation of primary care centers ("centers") with full risk
contracts are achieved through MedExec's subsidiaries: SPI Managed Care, Inc.
("SPI"), incorporated on February 19, 1988, SPI Managed Care of Hillsborough
County, Inc. ("SPI Hillsborough"), incorporated on April 20, 1993, Broward
Managed Care, Inc. ("BMC"), incorporated on January 21, 1994, and Midwest
Managed Care, Inc. ("Midwest"), incorporated on March 29, 1995.
SPI, SPI Hillsborough and BMC provide health care services subject to affiliated
provider agreements entered into with Humana Medical Plan, Inc.; Humana Health
Plan of Florida, Inc.; and Humana Health Insurance Company of Florida, Inc. and
their affiliates. Midwest provides health care services subject to affiliated
provider agreements entered into with Humana Health Plan, Inc.; Humana Health
Chicago, Inc.; and Humana Health Chicago Insurance Company, Humana Insurance
Company and their affiliates. All of the Humana entities will collectively be
known as "Humana". The Company is dependent on Humana for the majority of its
operations. For the year ended December 31, 1997, 73% of the Company's revenue
is from such agreements with Humana.
SPI operates two centers in Dade County, Florida located in Kendall and Cutler
Ridge.
F-8
<PAGE>
SPI Hillsborough operates five centers on the west coast of Florida located in
Plant City, New Port Richey, Lutz Springhill and South Dale Mabry. The
affiliated provider agreements to operate the centers in New Port Richey, Lutz
and South Dale Mabry were entered into in 1996 and 1997 for Springhill.
BMC operates two centers in Broward County, Florida located in Plantation and
Sunrise.
During 1996, Midwest operated one center in Hammond, Indiana. In February 1997,
Midwest also began to operate additional centers in Gary, Indiana.
Health services are provided to Humana members through the centers and their
networks of physicians and health care specialists. Services to be provided by
the centers include medical and surgical services, including all procedures
furnished in a physician's office such as X-rays, nursing services, blood work
and other incidental, drugs and medical supplies. The centers are responsible
for providing all such services and for directing and authorizing all other care
for Humana members. The centers are financially responsible for all out-of-area
care rendered to a member and provide direct care as soon as the member is able
to return to the designated medical center.
Humana has agreed to pay the centers monthly for services provided to members
based on a predetermined amount per member ("capitation") comprised of
in-hospital services and other services defined by contract ("Part A"),
in-office ("Primary") and other medical services defined by the agreements
("Part B"). For the Gary center, Humana has guaranteed a monthly amount to cover
the costs of providing primary care services and other operating costs. The
guaranteed payments were made until the earlier of the date on which the center
achieves a certain membership level or six months to one calendar year from the
commencement date of the agreement at which point Humana will pay the center a
capitation fee.
SPI Managed Care of Broward, Inc. ("SPI Broward"), incorporated in the State of
Florida on July 15, 1992, managed the full risk managed care segment of a
nonaffiliated multi-specialty group practice in Broward County, Florida.
Effective February 1, 1996, First Medical Corporation-Texas Division
(FMC-Texas") began managing a multi-specialty medical practice in Houston, Texas
("Houston medical practice") that has a full risk contract with Humana and
fee-for-service.
On December 31, 1995, FMC had a 23.75% and 50% investment, respectively, in BMC
and SPI Broward. Effective January 1, 1996 the Company acquired 71.25% and 50%
interest, respectively, in BMC and SPI Broward, respectively for $50,000 plus a
multiple of the average earnings before income taxes of these two entities
during the years ending December 31, 1996 and 1997. The multiple is three for
cash consideration, and 3.5 times for a combination of stock and cash. This
acquisition gave the Company a 95% and 100% investment in BMC and SPI Broward,
respectively. The final value of the consideration is not yet determinable as
the seller has the option of obtaining cash and/or stock and the price is based
on the average of 1996 and 1997 earnings. Additional goodwill was recorded at
December 31, 1997 of $1.5 million, which represents management's estimate of the
final consideration in accordance with the purchase method of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include all of the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash equivalents consist of demand deposits. For purposes of the
consolidated statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less
to be cash equivalents.
(c) Humana IBNR Receivable and Claims Reserve Funds
F-9
<PAGE>
Humana withholds certain amounts from the centers' Part A, Part B, and
supplemental funding in order to cover claims incurred but not reported or
paid. The amount is used by Humana to pay the centers' Part A, Part B and
supplemental costs. The amounts withheld by Humana to cover incurred but
not reported or paid claims varies by center based on the history of the
respective center and is determined solely by Humana.
Humana also withholds a certain amount each month from the centers' Part A
capitation funding. This amount represents a "catastrophic reserve fund"
to be utilized for the payment of a center's Part A costs in the event the
center ceases operations and the incurred but not reported reserves are
not adequate to reimburse providers for Part A services rendered. This
amount is calculated monthly by Humana.
The withholdings are used to pay the centers' medical claims, which Humana
pays on the centers' behalf. The remaining amount after claims have been
paid is remitted to the Company. The Company records the impact of the
above transactions on a grossed-up basis.
(d) Inventories
Inventories are stated at the lower of cost or market using a first-in,
first-out basis to determine cost. Inventories consist of electrical
supplies held for resale.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated
useful lives. Amortization of leasehold improvements is provided over the
life of each respective lease.
(f) Intangible Assets
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
The Company entered into non-compete agreements with a two former
employees and shareholders. These non-compete agreements are being
amortized on a straight-line basis over the life of the agreements, which
are two and three years respectively.
The Company entered into three employment/non-compete agreements with
three shareholders. The agreements consist of guaranteed payments
regardless if any services are rendered. These agreements are being
amortized on a straight line basis over 5 years which is the life of the
agreement (3 years) plus the subsequent non-compete period (2 years).
Deferred organization costs consist principally of legal, consulting and
investment banking fees, which were incurred strictly in connection with
the incorporation of FMC on January 1, 1996 and the merger with Lehigh on
July 9, 1997. The costs related to the FMC transaction and the merger with
Lehigh are being amortized over five years.
(g) Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on January 1, 1997. This Statement required that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events change and circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset of future
net cash flows expected to be generated by the asset. If such assets are
considered to be
F-10
<PAGE>
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair values less costs to sell. Adoption of this Statement did
not have a material impact on the Company's financial position, results of
operations, or liquidity. In 1997, the Company recorded an impairment loss
of approximately $3.9 million relating to the goodwill associated with the
merger (see footnote number 4).
(h) (h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets are measured using enacted rates to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(i) Earnings Per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which
provides for the calculation of "basic" and "diluted" earnings per share.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997. Basic earnings per share includes no
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect, in periods in which
they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and other stock equivalents. The adoption of
this new statement had no impact on the Company.
(j) Revenue and Medical Cost Recognition
Revenue from Humana for primary care, Part A, Part B and supplemental
funds are recognized monthly on the basis of the number of Humana members
assigned to the primary care centers and the contractually agreed-upon
rates. The primary care centers receive monthly payments from Humana after
all expenses paid by Humana on behalf of the centers; estimated claims
incurred but not reported and claims reserve fund balances have been
determined. In addition to Humana payments, the primary care centers
receive copayments from commercial members from each office visit,
depending upon the specific plan and options selected and receive payments
from non-Humana members on a fee-for-service basis.
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are reflected in the consolidated balance
sheet and are based upon costs incurred for services rendered prior to and
up to December 31, 1997. Included are services incurred but not reported
as of December 31, 1997, based upon actual costs reported subsequent to
December 31, 1997 and a reasonable estimate of additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to
patients and annual membership fees charged to individuals, families and
corporate members. Membership fees are non-refundable and are recognized
as revenue in the year received. Corporate members are also required to
make an advance deposit based upon plan type, number of employees and
dependents. The advance deposits are initially recorded as deferred income
and then as revenue when services are provided. As the advance deposits
are utilized, additional advance deposits are required to be made by
corporate members.
Fee-for-service revenue is reported at the estimated net realizable
amounts from patients and third-party payors as services are rendered.
Revenue for the electrical supplies distribution business is recognized
when products are shipped or when services are rendered.
F-11
<PAGE>
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(l) Fair Value of Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable and claims reserve funds, other
receivables, prepaid expenses and other current assets, accounts payable
and other accrued expenses, accrued medical claims, loan payable to
Humana, loans payable to banks, obligations to certain stockholders and
long-term debt approximate fair value at December 31, 1997 because of the
short term maturity of these instruments. The carrying amounts of certain
long-term debt including loans payable approximate fair value because the
interest rates on these instruments reflect prevailing market rates.
(m) Foreign Currency
The financial statements of the Company's foreign subsidiaries are
remeasured into the US dollar functional currency for consolidation and
reporting purposes. Current rates of exchange are used to remeasure assets
and liabilities and revenue and expense are remeasured at average monthly
exchange rates prevailing during the year. The effect of translation
adjustments would not have a material effect on the financial statements.
(n) Stop-loss Funding
The primary care centers are charged a stop-loss-funding fee by Humana for
the purpose of limiting a center's exposure to Part A costs and certain
Part B costs associated with a member's health services.
Since the SPI, SPI Hillsborough and Durham centers are not responsible for
claims in excess of the threshold, income and the corresponding expense,
both equal to the stop-loss funding are recognized by SPI, SPI
Hillsborough and Durham. These amounts are included in revenue and medical
expenses, respectively, in the accompanying consolidated statement on
income. Stop-loss funding for the SPI, SPI Hillsborough and Durham centers
for the year ended December 31, 1997 was approximately $5,102,000.
For the year ended December 31, 1997, the stop-loss threshold for both
part A and Part B costs for Medicare members was $40,000 per member per
calendar year for both SPI, SPI Hillsborough and Durham. For commercial
members, the stop-loss threshold for both Part A and Part B costs was
$20,000 and $15,000 for both SPI, SPI Hillsborough and Durham.
For Midwest, the stop-loss thresholds for Part A and for Part B costs for
Medicare members were $40,000 and $10,000, respectively, per member per
calendar year and the stop-loss thresholds for Part A and for Part B for
commercial members were $50,000 and $10,000 respectively, per member per
calendar year.
(o) Maternity Funding
The primary care centers are charged a maternity funding fee on commercial
membership for the purpose of limiting the center's exposure to Part A and
Part B costs associated with a commercial member's pregnancy or related
illness. Since the SPI, SPI Hillsborough and Durham centers are not
responsible for claims in excess of the amount contributed to the
maternity fund, income and expenses both equal to the maternity fund are
recognized by SPI, SPI Hillsborough and Durham are included in revenue and
medical expenses, respectively in the accompanying consolidated statement
of operations. Maternity funding for the SPI, SPI Hillsborough and Durham
centers for the year ended December 31, 1997 was approximately $966,000.
F-12
<PAGE>
3. Property and Equipment, Net
Property and equipment at December 31, 1997 consists of the following:
Medical, computer and office equipment $ 941,479
Machinery and equipment 501,851
Furniture and fixtures 99,879
Leasehold improvements 434,715
----------
1,977,924
Less: Accumulated depreciation and amortization 1,245,007
Property and equipment, net $ 732,917
4. Intangible Assets
Intangible assets at December 31, 1997 consists of:
Goodwill $2,998,908
Employment/non-compete agreements with 964,800
former executives
Organization costs 830,658
Non-compete agreements with former 1,095,000
Shareholders
Other 480,005
6,369,371
Less: Accumulated amortization 1,007,755
$5,361,616
As stated in note 1, the following transactions created goodwill at
December 31, 1997.
AMCMC $1,020,075
BMC BMC and SPI Broward 1,827,778
Midwest Managed Care 150,855
----------
$2,998,908
The Company recorded $1.5 million in 1997 in additional goodwill
associated with the purchase of BMC.
The Company continually reevaluates the propriety of the carrying amount
of goodwill and other intangible assets as well as the amortization period
to determine whether current events and circumstances warrant adjustments
to the carrying value and estimates of useful lives. As of December 31,
1997, the Company believed that no significant impairment of goodwill or
other intangible assets (noted above) have occurred and that no reduction
of the amortization periods is warranted.
Subsequent to the merger with The Lehigh Group, Inc., the Company lost its
listing on the New York Stock Exchange and had received an indication of
value of Lehigh's only wholly owned subsidiary, HallMark Electrical
Supply, Inc. On the basis of the value, the delisting from the New York
Stock and the proposed sale of the HallMark subsidiary, the goodwill was
deemed to be unrecoverable, and as a result the Company recorded a $3.9
million impairment loss in 1997 which represented the entire amount
recorded as goodwill at the time of the merger (net of amounts amortized
during the year).
F-13
<PAGE>
5. Loans Payable to Humana
Loans payable to Humana at December 31, 1997 consist of the following:
Secured loan for $250,000 bearing interest at 9.5%. Payable
in 48 monthly installments beginning in February 1997 of
$6,850 which includes principal and interest. The loan is
secured by the Company's equipment and furnishings at the
Houston medical practice. Proceeds from the loan were used
primarily for the purchase of equipment at the Houston
medical practice. $ 225,362
Secured loan for $75,000 bearing interest at 9.5%. Payable
in twelve monthly installments beginning in February 1997
which includes principal and interest of $7,172. The loan
is secured by the Company's equipment and furnishings at
the Houston medical practice. Proceeds from the loan were
used primarily for working capital needs of FMC-Texas in
Houston medical practice. 14,288
Unsecured loan for $240,000 bearing no interest. Payable in
12 monthly installments beginning in April 1997 of $20,000.
Proceeds from the loan were used primarily for the
operations of a Midwest Center medical practice. 240,000
Advance of $50,000 bearing interest at 10% per year for the
purchase and installation of a computer system and related
training at the Midwest locations. The loan is due by
September 30, 2000. Monthly installments to Humana will be
a minimum of 10% of any positive balance in Midwest's Part
A Fund. In the event no positive balance exists in the Part
A Fund, Midwest will make a minimum monthly payment of
$1,268 until the loan is repaid. 50,000
Advance of $50,000 bearing interest at 10% per year for the
purchase and installation of a computer system and related
training at a Midwest locations. The loan is due by
September 30, 2000. Monthly installments to Humana will be
a minimum of 10% of any positive balance in Midwest's Part
A Fund. In the event no positive balance exists in the Part
A Fund, Midwest will make a minimum monthly payment of
$1,268 until the loan is repaid. 50,000
Unsecured loan for $100,000 bearing no interest. Payable
through a monthly set-off from a portion of capitation
premiums paid by Humana to a Midwest medical center. The
loan is due by July 1999. 79,980
----------
Total long-term loans payable to Humana 659,630
F-14
<PAGE>
Less current installments 366,489
Loans payable to Humana, excluding current installments $293,141
========
The aggregate maturities of loans payable to Humana for each of the five
years subsequent to December 31, 1997 are as follows:
1998 $ 366,489
1999 180,783
2000 98,739
2001 13,619
2002 -
----------
$ 659,630
==========
6. LONG-TERM DEBT
Long-term debt at December 31, 1997 consist of the following:
Secured term loan for $537,812 bearing interest at 1/2%
above prime (9.0% at December 31, 1997): The loan is
secured by all shares of FMG common stock issued to FMC.
Principal payment are made monthly with the balance due on
October 1998. The $537,812 drawn under this loan was used
to purchase Lehigh stock in connections with the Merger. $537,812
Line of credit for $2,500,000 bearing interest at 1/2%
above prime (9.0% at December 31, 1997). The line is
secured by all of the assets of FMC and $500,000 is
guaranteed by certain current and former officers of FMC.
The line expires in July 1998. The amounts drawn under this
line of credit was used primarily for working capital
requirements. 2,290,000
Secured term loan for $200,000 bearing interest at prime
(8.50% at December 31, 1997). The loan is secured by the
assets of FMG's Midwest Managed Care operations and is
guaranteed by FMC. Principal payments of $3,333 are made
monthly with the balance due in November 2000. Interest is
paid monthly. The $200,000 was used primarily for
development costs relating to Midwest. 193,333
Secured term loan for $200,000 bearing interest at prime
(8.50% December 31, 1997). The loan is secured by the
assets of FMG's Midwest Managed Care operation and is
guaranteed by FMC. The principal balance is due on May 12,
1998. Interest is due monthly. The $200,000 was drawn under
this loan for development costs relating to Midwest. 200,000
F-15
<PAGE>
Secured line of credit for $5.0 million bearing interest at
prime plus 2% (10.50% at December 31, 1997). The line of
credit is secured by accounts receivable, inventory,
property and equipment. The line of credit expires in
November 1999. The amount drawn under the line of credit
was used to support working capital needs in the electrical
distribution business. 4,979,709
Subordinated Debentures - 14-7/8% interest rate 290,000
Senior Subordinated Notes - 13-1/2% interest rate 100,000
-------
8,590,854
Less current portion (3,457,812)
----------
Total Long-term Debt $5,133,042
==========
The Company is in default in the payment of interest (approximately
$781,000 interest was past due as of December 31, 1997) on the $390,000
aggregate principal amount of its 13-1/2% Senior Subordinated Notes due May 15,
1998 ("13-1/2% Notes") and 14-7/8% Subordinated Debentures due October 15, 1995
("14-7/8% Debentures') that remain outstanding and were not surrendered to the
Company in connection with its financial restructuring consummated in 1991. The
Company has been unable to locate the holders of the 13-1/2% Notes and 14-7/8%
Debentures (with the exception of certain of the 14-7/8% Debentures, which were
retired during 1996). Interest relating to the debt is included in accrued
expenses.
The aggregate yearly maturities of long-term debt for the years
ended after December 31,1997 are as follows:
1998 $3,457,812
1999 5,019,709
2000 113,333
2001 -
2002 -
----------
Total $8,590,854
==========
7. RELATED PARTY TRANSACTIONS
At December 31, 1997, obligations to certain shareholders includes the
following:
Obligation to pay consulting fees to three stockholders in
connection with the transaction between MedExec and AMC.
Obligations have been recorded as a liability due to the
stockholders not having to provide any services for this
consideration to be paid. Payable monthly in the amount of
$26,800. Obligations will be repaid by December 31, 1998.
The amount of consideration paid in 1997 related to these
agreements were $254,600. $388,600
Obligation under non compete agreement with a former
employee and stockholder payable in monthly installments of
$8,333 until June 1998. 50,000
F-16
<PAGE>
Obligation under non compete agreement with a former
employee and stockholder payable in monthly installments of
$9,139 until April 2000. 246,750
Obligations under non-compete agreement with a former
employee and stockholder. 530,000
Total obligation to stockholders 1,215,350
Less current installments 548,267
---------
Total obligations to stockholders, excluding current
installments $ 667,083
=========
The aggregate maturities of obligations to stockholders for each of the five
years subsequent to December 31, 1997 are as follows:
1998 $ 548,267
1999 109,668
2000 557,415
2001 -
2000 -
-----------
Total $ 1,215,350
===========
The Company paid salaries or consulting fees to stockholders of approximately
$1,645,600 which is included in the consolidated statement of income for the
year ended December 31, 1997.
Certain stockholders have guaranteed $500,000 of the outstanding line of credit
with the financial institution which is described in note 6.
At December 31, 1997, the Company has amounts outstanding from the AMC clinics
which is owned by certain current and former shareholders of FMC, under its
management agreement with AMCMC, which total $1,139,760.
(8) Income Tax
The components of loss before income tax benefit and cumulative effect of
a change in accounting principle for the year ended December 31, 1997 are
as follows:
Domestic $(9,743,532)
Foreign 1,201,883
-----------
Total loss before income tax benefit and cumulative
effect of a change in accounting principle $(8,541,649)
============
The components of income tax benefit for the year ended December 31, 1997
are as follows:
Current tax provision - foreign operations $ 267,291
Write off of prior year deferred tax liability (112,500)
Write off of prior year income taxes payable (217,527)
-----------
Net Income Tax Benefit $ ( 62,736)
===========
At December 31, 1997, The Company had a net deferred tax asset amounting to $4.5
million. The net deferred tax asset at December 31, 1997 consists primarily of
net operating loss ("NOL") carryforwards, and temporarily differences resulting
from accounts receivable and inventory reserves and goodwill. The deferred tax
asset is fully offset by a valuation allowance of the same amount due to
uncertainty regarding its ultimate utilization.
Deferred tax assets:
Nondeductible accrual and allowances $ 660,000
F-17
<PAGE>
Goodwill 191,000
Net operating loss carryforward 3,700,000
Deferred tax liability:
Depreciation and amortization (40,000)
Goodwill asset -
-----------
Net deferred tax asset/(liability) 4,511,000
Less: Valuation allowance 4,511,000
-----------
Deferred income taxes $ -
===========
Due to the Company's large loss in 1997, no federal taxes have been provided in
the accompanying consolidated statement of operations. As of December 31, 1997,
the Company had NOL
carryforwards of approximately $9.3 million expiring through 2017.
The Company has provided a 100% valuation allowance due to the net operating
loss carryforward. In assessing the recoverability of deferred tax assets,
management considers whether it is more likely than not that some or a portion
of the deferred assets will be realized in the near future.
9. Leases
The Company has several noncancelable operating leases primarily for
office space and equipment that expire throughout 2001. Future minimum
lease payments required under noncancelable operating leases at December
31, 1997 are as follows:
Year ending
December 31,
------------
1998 $478,000
1999 389,000
2000 289,000
2001 193,000
2002 121,000
Thereafter 192,000
---------
Total minimum lease payments $1,662,000
Rental expense during 1997 amounted to approximately $662,500.
The Company also rents medical facilities through its affiliated provider
agreements with Humana. The total non-lease rental expense relating to these
facilities use is approximately $1,315,000 for the year ended December 31, 1997.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company derives the majority of its revenue from its affiliated
provider agreements with Humana. In 1997, 73% or approximately $57,560,000
of the revenue of the Company was derived from such agreements with
Humana. The amount of revenue is based on the number of members assigned
to each of the centers. Humana members include 11,129 Medicare members and
9,531 commercial members, at December 31, 1997. The fluctuation of the
number of members significantly affects the Company's business. The
receivable from Humana at December 31, 1997 was $8,953,707.
11. RETIREMENT PLANS
The Company sponsors 401(K) plans (the "Plans") for its domestic
operations. Employees who have worked a minimum of six months or 1000
hours and are at least 21 years of age may participate in the Plans.
Employees may contribute to the Plans up to 14 percent of their annual
salary, not to exceed $9,500
F-18
<PAGE>
in 1997. The Company's matching contribution is 25 cents for each dollar
of the employee's elected contribution, up to four percent of the
employee's annual salary. The Company's matching contribution was
approximately $32,000 for the year ended December 31, 1997.
12. COMMITMENTS AND CONTINGENCIES
Legal Proceeding
To the best of the Company's knowledge, there are no material claims,
dispute or other unsettled matters (including retroactive adjustments)
concerning third party reimbursements that would have a material effect on
the consolidated financial statements of the Company.
Governmental Regulations
The Company's operations have been and may be affected by various forms of
governmental regulation and other actions. It is presently not possible to
predict the likelihood of any such actions, the form which such actions
may take, or the effect such actions may have on the Company.
Physician Contracts
The Company has entered into employment agreements of two to three years
with its primary care physicians and into contracts with various
independent physicians to provide specialty and other referral services
both on a prepaid and a negotiated fee-for-service basis. Such costs are
included in the consolidated statement of income as medical expense.
Malpractice and Professional Liability Insurance
The Company maintains professional liability insurance on a claims-made
basis through November 1, 1998 including retrospective coverage for acts
occurring since inception of its operations. Incidents and claims reported
during the policy period are anticipated to be covered by the malpractice
carrier. The Company intends to keep such insurance in force throughout
the foreseeable future. At December 31, 1997, there are no asserted claims
made against the Company that were not covered by the policy.
Physicians providing medical services to members are provided malpractice
insurance coverage (claim-made basis), including retrospective coverage
for acts occurring since their affiliation with the Company.
13. SEGMENT INFORMATION
The Company operates in two industry segments. HallMark Electric Supplies
Corporation, a wholly owned subsidiary of the Company, is engaged in the
distribution of electrical supplies for the construction industry.
Approximately 90% of the Hallmark's sales are domestic and 10% are export.
First Medical Group, Inc. is a national and international provider of
management, consulting and financial services to physicians and other
health care organizations and facilities. Approximately 87% of its
revenues are derived from its domestic operations while 13% is generated
through its international operations.
The industrial and geographical information relating to revenues,
operating loss, total assets, and depreciation and amortization for the
year ended December 31, 1997 is as follows:
INDUSTRIAL SEGMENTS
Electrical
Supplies Medical
Distribution Service Total
------------ ------- -----
Revenues $8,391,632 $71,003,426 $79,475,058
Loss before income tax benefit
and cumulative effect of a change
in accounting principle (3,500,485) (5,041,164) (8,541,649)
F-19
<PAGE>
Total Assets 13,914,766 13,630,619 27,545,385
Depreciation and Amortization 174,033 857,304 1,031,337
GEOGRAPHIC DATA
The Company's operations are conducted in several geographic regions:
United States, Europe and the Commonwealth of Independent States. The
following is a summary of the company's operations by geographic segment,
as of and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Commonwealth of
United States Europe Independent States Total
------------- ------ ------------------ -----
<S> <C> <C> <C> <C>
Revenue $ 70,455,902 $ 698,688 $ 8,320,468 $ 79,475,058
Income (loss) before taxes and
cumulative effect of a change in
accounting principle (9,743,532) (66,472) 1,268,355 (8,541,649)
Total Assets 24,449,123 89,360 3,006,902 27,545,384
</TABLE>
14. SUBSEQUENT EVENTS
The Company entered into an agreement on April 8, 1998 for the sale of ten
medical facilities located in Florida. The facilities are being sold to a
publicly held Company for a total consideration of $6,750,000. The
agreement was closed on April 14, 1998. The proceeds from the sale will be
used to pay down the Company's existing debt as well as to provide working
capital for operations.
The Company also entered into an agreement in principle for the sale of
its HallMark subsidiary to an officer/shareholder of the Company for a
total consideration of $1,901,000 including a cash payment of $750,000 and
the assumption of specific liabilities of the Company.
The transaction is scheduled to close in the near future.
The following unaudited pro forma condensed financial information gives
effect to the transactions described above as if such events had occurred
on January 1, 1997. This financial information is presented for
informational purposes only and does not purport to represent what FMG's
results of operations would actually have been if the aforementioned
transactions had occurred on the dates specified or to project FMG's
results of operations for any future periods.
F-20
<PAGE>
FIRST MEDICAL GROUP, INC.
UNAUDITED PRO-FORMA CONDENSED BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO-FORMA
(See Note 1) (See Note 2)
ASSETS
<S> <C> <C> <C> <C>
Cash $ 1,151,416 $ 1,391,602 $ (183,379) $ 2,359,639
Other current assets 19,944,777 (5,442,037) (9,240,545) 5,262,195
Other assets 6,449,192 (2,214,123) (95,128) 4,139,941
Net assets held for disposal -- -- 1,903,000 1,903,000
------------ ------------ ------------ ------------
Total assets $ 27,545,385 $ (6,264,558) $ (7,616,052) $ 13,664,775
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities $ 22,505,840 $(10,819,090) $ (2,636,343) $ 9,050,407
Other liabilities 6,093,266 (161,345) (4,979,709) 952,212
Shareholders' equity (deficit) (1,053,721) 4,715,877 -- 3,662,156
------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity (deficit) $ 27,545,385 $ (6,264,558) $ (7,616,052) $ 13,664,775
============ ============ ============ ============
</TABLE>
Note 1:
(a) Recording sale of Florida medical centers for $6.75 million in cash for
certain net assets of $430,049 with difference recorded to retained earnings.
(b) Pay-off loans at bank for $2,827,812 with proceeds from sale and reduce
interest expense by $180,000.
(c) Pay-off amounts due to Humana in Florida and Texas of $1,227,045 with the
proceeds from the sale.
(d) Pay-off amounts due for accounts payable and other accrued liabilities of
$1,483,541 with the proceeds from the sale.
(e) Write-off goodwill of $1,784,074 recorded from the purchase of BMC.
(f) Reclass accrued medical claims payable of $5,442,037 to IBNR receivable.
Note 2:
(a) Reclass Hallmark Electrical Supplies Corp. assets and liabilities to net
assets held for disposal of $1,903,000.
F-21
<PAGE>
FIRST MEDICAL GROUP, INC.
RESULTS OF OPERATIONS FOR DIVISIONS TO BE SOLD
December 31, 1997
<TABLE>
<CAPTION>
MEDICAL
HISTORICAL CENTERS HALLMARK PRO-FORMA
------------ ------------ ------------ ------------
(See Note 1) (See Note 2)
<S> <C> <C> <C> <C>
Revenues $ 79,475,058 $(50,318,639) $ (8,362,965) $ 20,793,454
Cost of operations 71,438,165 (47,695,118) (5,925,502) 17,817,545
------------ ------------ ------------ ------------
Gross margin 8,036,893 (2,623,521) (2,437,463) 2,975,909
General and administrative 16,002,162 (4,731,087) (2,078,029) 9,193,046
Other expenses 576,379 1,475,138 (218,586) 1,832,931
------------ ------------ ------------ ------------
Income from operations (8,541,648) 632,428 (140,848) (8,050,068)
Income from operations of discontinued 140,848 140,848
division -- -- -- --
------------ ------------ ------------ ------------
Loss before tax benefit (8,541,648) 632,428 -- (7,909,220)
Income tax benefit 62,737 -- -- 62,737
------------ ------------ ------------ ------------
Net loss $ (8,478,911) $ 632,428 $ -- $ (7,846,483)
============
============ ============ ============ ============
</TABLE>
Note 1:
(a) Reverse the 1997 combined statement of operations of the medical centers
sold.
(b) Reverse the 1997 statement of operations for the Miami corporate office
overhead, net of adjustments.
(c) Reduce interest expense by approximately $180,000 as a result of paying off
loans to bank.
(d) Write-off goodwill of $1,784,074 recorded from the purchase of BMC.
Note 2:
(a) Reverse and reclass the statement of operations for Hallmark Electrical
Supplies Corp. to income from discontinued operations of $140,848.
F-22
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $63,014
Humana IBNR receivable and claims reserve funds (note 10) 7,308,482
Other receivables, net of $50,000 reserve for uncollectible accounts 536,506
Due from related parties, net (note 7) 462,329
Prepaid expenses and other current assets (note 1(d)) 179,125
------------
Total current assets 8,549,456
Property and equipment, net (note 3) 399,841
Intangible assets, net (note 4) 2,735,848
Minority interest 338,077
Other assets (note 1(d)) 300,000
------------
$12,323,222
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued expenses $2,037,447
Accrued medical claims, including amounts incurred but not reported 6,070,506
Corporate deposits 806,476
Loans payable to Humana (note 5) 97,628
Loans payable to banks (note 6) 750,000
Obligations to certain stockholders (note 7) 421,600
Deferred income taxes, net (note 8) 112,500
Income taxes payable (note 8) 300,000
------------
Total current liabilities 10,596,157
Loans payable to Humana, net of current maturities (note 5) 277,372
Obligations to certain stockholders, net of current maturities (note 7) 746,196
-----------
Total liabilities 11,619,725
-----------
Stockholders' equity:
Capital stock 15,000 shares authorized; 10,000 shares issued and outstanding at 100
par value, $.01 per share
Additional paid-in capital 379,685
Retained earnings 323,712
-----------
Total stockholders' equity 703,497
-----------
Commitments and contingencies (note 12)
$12,323,222
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Capitated revenue - Humana (note 10) $ 45,069,743
Fee for service 7,075,458
Other revenue 869,124
----------
Total revenue 53,014,325
-----------
Medical expenses 43,526,181
-----------
Gross profit 9,488,144
Operating expenses:
Salaries and related benefits (note 7) 3,502,860
General and administrative 4,172,568
Depreciation and amortization 530,490
Minority interest in net loss of consolidated subsidiaries (338,077)
Preopening and development costs related to international clinics 828,568
-----------
Total operating expenses 8,696,409
Income before interest, taxes, and other 791,735
-----------
Other expense:
Interest expense, net (55,523)
Other expense (55,523)
-------
Income before taxes 736,212
Provision for income taxes (note 8) 412,500
-----------
Net income $ 323,712
===========
Supplemental Earnings per share after giving effect to
the merger and the 1-for-30 reverse stock split
with Lehigh Group, Inc. on July 9, 1997 (see note 2(M)) $ .04
==========
</TABLE>
See accompanying notes to consolidated financial statements
F-24
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996
<TABLE>
<CAPTION>
Additional Total
Capital paid- Retained stockholders'
Stock in capital earnings equity
----- ---------- -------- ------
<S> <C> <C> <C>
Balance, December 31, 1995 $1,500 $1,200 $224,595 $227,295
FMC Corporate transaction (1,400) 225,995 (224,595) --
Capital contribution to AMCD -- 152,490 -- 152,490
Net income -- -- 323,712 323,712
------ -------- -------- --------
Balance, December 31, 1996 $ 100 $379,685 $323,712 $703,497
====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
Cash flows from operating activities:
<TABLE>
<CAPTION>
<S> <C>
Net income $323,712
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 530,490
Gain on equity investments (78,259)
Minority interest in net loss of consolidated subsidiaries (338,077)
Change in assets and liabilities, net of acquisitions :
Increase in Humana IBNR receivable and claims reserve funds (2,343,563)
Increase in other receivables (536,506)
Increase in due from related parties, net (457,447)
Increase in prepaid expenses and other current assets (94,438)
Increase in other assets (300,000)
Increase in accounts payable and other accrued expenses 450,634
Increase in accrued medical claims, including amounts incurred but not reported 1,858,086
Increase in corporate deposits 56,201
Increase in income taxes payable 278,272
Increase in deferred income taxes liability, net 83,027
--------
Net cash used in operating activities (567,868)
-----------
Cash flows used in investing activities:
Capital expenditures (119,328)
Organizational costs (477,790)
Acquisition of additional ownership interests in BMC, SPI Broward, and Midwest, net (151,249)
of cash acquired
Proceeds from sale of investment 300,000
---------
Net cash used in investing activities (448,367)
----------
Cash flows provided by financing activities:
Proceeds from loan payable to Humana 325,000
Proceeds from loans payable to banks 650,000
Repayment of loans payable to banks (250,000)
Proceeds from payable to stockholders 374,596
Payment of obligation to stockholders (371,600)
Contribution to capital of AMCD 152,490
---------
Net cash provided by financing activities 880,486
---------
Decrease in cash and cash equivalents (135,749)
Cash and cash equivalents, beginning of year 198,763
---------
Cash and cash equivalents, end of year $ 63,014
========
Supplemental disclosure cash flow information: Cash paid during the year for:
Interest $ 48,748
========
Income taxes $ 33,291
========
</TABLE>
F-26
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Supplemental disclosure of noncash flow:
(1) As described in note (1), AMCMC purchased certain assets and assumed
certain liabilities in the amount of $1,020,275 which is included in
goodwill at December 31, 1996 (note 4).
(2) The Company entered into a noncompete agreement with a shareholder and
former employee in the amount of $200,000.
(3) Effective January 1, 1996, the Company acquired a controlling interest in
two of its equity investments (see note 1(a)). The fair value of the assets
acquired and liabilities assumed were:
Assets Liabilities Net Assets
------ ----------- ----------
SPI Broward $ 117,085 55,558 61,527
Broward $3,082,464 3,242,579 (160,155)
(4) The Company entered into employment/non-compete agreements with three
executives in the amount of $964,800.
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND OPERATION
First Medical Corporation ("FMC" or the "Company") is an international provider
of management, consulting, and financial services to physicians, hospitals and
other health care delivery organizations and facilities. FMC's operations are
conducted through three divisions: (a) a physician practice management division
which provides physician management services including the operation of clinical
facilities and management services to medical groups, (b) an international
division which manages medical centers in Eastern Europe and the Commonwealth of
Independent States (the former Soviet Union) ("CIS"), and (c) a recently formed
hospital services division which will provide a variety of administrative and
clinical services to proprietary acute care hospitals and other health care
providers.
The consolidated financial statements include the accounts of FMC and its
majority owned subsidiaries: MedExec, Inc. and subsidiaries ("MedExec");
American Medical Clinics Management Company, Inc. ("AMCMC"); American Medical
Clinics Development Corporation, Limited ("AMCD") and FMC Healthcare Services,
Inc. ("FMC-HS"). All significant intercompany balances and transactions have
been eliminated in consolidation.
MedExec, Inc. ("MedExec") was incorporated on March 14, 1991.
On January 1, 1996 MedExec and American Medical Clinics, Inc. (AMC) entered into
a transaction which consisted of the following:
* AMC and MedExec incorporated FMC;
* All of the outstanding shares of MedExec and AMC were converted into shares
of FMC;
* The shareholders of MedExec and AMC received 48% and 52% of the shares of
FMC, respectively;
* 100% of the AMC shares were distributed to the shareholders of FMC (former
shareholders of MedExec received 48% of the distributed shares of AMC);
* In connection with the above transaction, FMC entered into separate
employment contracts with three executives of MedExec whereby the
respective executives are guaranteed payments regardless if any services
are rendered. The agreements are for a three year period and when the
contracts expire they include an additional two year covenant not to
compete. The employment/non-compete agreements have been classified as
intangible assets in the financial statements and are being authorized over
five years. (See Note 4).
The above transaction was accounted for under the purchase method of accounting
with MedExec being deemed the accounting acquirer despite the fact that AMC
received 52% of the shares of FMC. This result was reached due to among other
factors the fact that immediately after this transaction, the FMC Board of
Directors was comprised of four former shareholders of MedExec and three former
shareholders of AMC and the fact that MedExec constituted the larger share of
operations. Because of the short term monetary nature of AMC's assets and
liabilities, historical book values constituted fair value on the transaction
date resulting in no purchase price adjustments under Accounting Principles
Board No. 16.
F-28
<PAGE>
On January 2, 1996, AMCMC, a newly formed subsidiary of FMC, acquired from AMC a
membership list (contracts to provide medical services to customers) and assumed
certain liabilities of AMC. The transaction was accounted for under the purchase
method of accounting because, in essence, the purchase of the membership list
represented the acquisition. AMCMC acquired the income stream of an operating
enterprise. Goodwill was recorded in the amount of $1,020,275 related to this
transaction.
AMCMC, a wholly owned subsidiary of the Company, has entered into a management
services agreement with the AMC clinics located in the CIS, whereby the AMC
clinics provide medical services to AMCMC customers (see note 7). AMCMC collects
all of the revenues directly from its members, which it is legally entitled to
collect. AMCMC also pays all of AMC's expenses, including but not limited to the
salaries of the physicians, which it is legally obligated to pay.
On January 20, 1996, the Company entered into an agreement with Generale de
Sante International, plc ("GDS") to form AMCD, an Irish company. AMCD was
established to develop and operate medical clinics throughout the world with the
exception of within the CIS. The Company and GDS's shareholderings in AMCD
Common Stock, as revised, are 51% and 49%, respectively. The authorized share
capital of AMCD is comprised of 1,000 shares of Common Stock, $1.00 par value.
As consideration for the shares, the Company agreed to contribute certain assets
at historical cost in the amount of $300,001. GDS agreed to contribute $299,999
to AMCD and provide a credit facility of up to $1.2 million to be used for the
development of new clinics. These contributions resulted in total capital of
AMCD of $600,000. Included in the statement of cash flows for the year ended
December 31, 1996 is $152,490 for GDS's capital contribution of $299,999. GDS
has an option to purchase up to 51% of the AMCD's Common stock in the event
certain changes in management control occur. The additional consideration will
be determined by the Company and GDS.
(A) PHYSICIAN PRACTICE MANAGEMENT DIVISION - MEDEXEC
The Company's physician practice management operations are currently conducted
through MedExec. MedExec functions in two capacities as a management services
organization: (i) owning and operating nine primary care centers (located in
Florida and Indiana) which have full risk contracts for primary care and part B
services and partial risk (50%) for part A services, and (ii) managing sixteen
multi-specialty groups (located in Florida and Texas) with fee-for service and
full risk contracts for primary care and part B services and partial risk (50%)
for part A services. Full risk contracts are contracts with managed care
companies where FMC assumes essentially all responsibility for a managed care
members' medical costs and partial risk contracts are contracts where FMC
assumes partial responsibility for a managed care members' medical costs.
Ownership and operation of primary care centers ("centers") with full risk
contracts are achieved through MedExec's subsidiaries: SPI Managed Care, Inc.
("SPI"), incorporated on February 19, 1988, SPI Managed Care of Hillsborough
County, Inc. ("SPI Hillsborough"), incorporated on April 20, 1993, Broward
Managed Care, Inc. ("BMC"), incorporated on January 21, 1994, and Midwest
Managed Care, Inc. ("Midwest"), incorporated on March 29, 1995.
F-29
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
SPI, SPI Hillsborough, and BMC provide health care services subject to
affiliated provider agreements entered into with Humana Medical Plan, Inc.;
Humana Health Plan of Florida, Inc.; and Humana Health Insurance Company of
Florida, Inc. and their affiliates. Midwest provides health care services
subject to affiliated provider agreements entered into with Humana Health Plan,
Inc., Humana Health Chicago, Inc.; and Humana Health Chicago Insurance Company,
Humana Insurance Company and their affiliates. All of the Humana entities will
collectively be known as "Humana". The Company is dependent on Humana for the
majority of its operations. For the year ended December 31, 1996, 85 percent of
the Company's revenue is from such agreements with Humana.
SPI operates two centers in Dade County, Florida located in Kendall and Cutler
Ridge.
SPI Hillsborough operates four centers in the west coast of Florida located in
Plant City, New Port Richey, Lutz, and South Dale Mabry. The affiliated provider
agreements to operate the centers in New Port Richey, Lutz and South Dale Mabry
were entered into in 1996.
BMC operates two centers in Broward County, Florida located in Plantation and
Sunrise.
During 1996, Midwest operated one center in Hammond, Indiana. In February 1997,
Midwest also began to operate an additional center in Gary, Indiana.
Health services are provided to Humana members through the centers and their
networks of physicians and health care specialists. Services to be provided by
the centers include medical and surgical services, including all procedures
furnished in a physician's office such as X-rays, nursing services, blood work
and other incidental, drugs and medical supplies. The centers are responsible
for providing all such services and for directing and authorizing all other care
for Humana members. The centers are financially responsible for all out-of-area
care rendered to a member and provide direct care as soon as the member is able
to return to the designated medical center.
Humana has agreed to pay the centers monthly for services provided to members
based on a predetermined amount per member ("capitation") comprised of
in-hospital services and other services defined by contract ("Part A"),
in-office ("Primary") and other medical services defined by the agreements
("Part B"). For new or start-up centers like the Gary center, Humana has
guaranteed a monthly amount to cover the costs of providing primary care
services and other operating costs. The guaranteed payments are made until the
earlier of the date on which the center achieves a certain membership level or
six months to one calendar year from the commencement date of the agreement at
which point Humana will pay the center a capitation.
SPI Managed Care of Broward, Inc. ("SPI Broward"), incorporated in the State of
Florida on July 15, 1992, manages the full risk managed care segment of a
nonaffiliated multi-specialty group practice in Broward County, Florida.
Effective February 1, 1996, First Medical Corporation-Texas Division
("FMC-Texas") began managing a multi-specialty medical practice in Houston,
Texas ("Houston medical practice") that has a full risk contract with Humana and
fee-for-service.
On December 31, 1995, FMC had a 23.75% and 50% investment, respectively, in BMC
and SPI Broward. Effective January 1, 1996 the Company acquired 71.25% and 50%
interest, respectively, in BMC and SPI Broward, respectively for $50,000 plus a
multiple of the average earnings before income taxes of these two entities
during the years ending December 31, 1996 and 1997. The multiple is three for
cash consideration, and 3.5 times for a combination of stock and cash. Based
upon the earnings of BMC for the year ended December 31, 1996 and assuming that
the multiple used is 3.5 times, the purchase price for the acquisition would
F-30
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
approximate $1.7 million. This acquisition gives the Company a 95% and 100%
investment in BMC and SPI Broward, respectively. The final value of the
consideration is not yet determinable as the seller has the option of obtaining
cash and/or stock and as the price is based on the average of 1996 and 1997
earnings. Additional goodwill will be recorded at the time the transaction is
finalized in accordance with the purchase method of accounting. Goodwill at
December 31, 1996 amounted to $327,778.
On December 31, 1995, the Company had a 66 2/3% investment in Midwest. Effective
January 1, 1996, the Company acquired the remaining investment and recorded
goodwill of $150,855 as a result of the purchase method of accounting. Book
value constituted fair value on the transaction date.
(B) HOSPITAL SERVICES DIVISION- FMC-HS
FMC-HS was incorporated on June 13, 1996 and is 51% owned by the Company and 49%
owned by General de Sante International, PLC ("GDS"). The Company commenced
operations in August 1996 and plans to provide management, consulting, and
financial services to troubled not-for-profits and other health care providers.
(C) PROPOSED LEHIGH MERGER
On October 29, 1996, the Company entered into a proposed merger agreement with
the Lehigh Group, Inc. ("Lehigh") whereby upon merger, FMC would control
approximately 96% of Lehigh. The proposed merger is subject to stockholder
approval of Lehigh and the Company. Under the terms of the proposed merger, each
share of the FMC Common Stock would be exchanged for (i) 1,127.675 shares of
Lehigh Common Stock and (ii) 103.7461 shares of Lehigh Preferred Stock. Each
share of Lehigh Preferred Stock will be convertible into 250 shares of Lehigh
Common Stock and will have a like number of votes per share, voting together
with the Lehigh Common Stock. Currently, there are outstanding 10,000 shares of
FMC Stock. As a result of these actions, immediately following the merger,
current Lehigh stockholders and FMC stockholders will each own 50% of the issued
F-31
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
and outstanding shares of Lehigh Common Stock. In the event that all of the
shares of Lehigh Preferred Stock issued to the Company's stockholders are
converted into Lehigh Stock, Lehigh stockholders will own approximately 4% and
the Company's stockholders will own approximately 96% of the issued and
outstanding shares of Lehigh Common Stock. In addition, under the terms of the
proposed merger agreement, Lehigh will be renamed "First Medical Group, Inc."
In connection with the proposed merger, Lehigh issued a convertible debenture to
the Company in the amount of $300,000 with interest at two percent per annum
over the prime lending rate. The debenture is recorded in other assets. In
addition, the Company advanced $50,000 to Lehigh. The advance is included in
prepaid expenses and other current assets.
On February 12, 1997, the Company purchased 1,920,757 shares of Lehigh stock for
$.281 per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits. For purposes of the consolidated
statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be a cash
equivalent.
(B) HUMANA IBNR RECEIVABLE AND CLAIMS RESERVE FUNDS (63)
Humana withholds certain amounts each month from the centers' Part A, Part B,
and supplemental funding in order to cover claims incurred but not reported or
paid. The amount is used by Humana to pay the centers' Part A, Part B and
supplemental costs. The amounts withheld by Humana to cover incurred but not
reported or paid claims varies by center based on the history of the respective
center and is determined solely by Humana.
Humana also withholds a certain amount each month from the centers' Part A
capitation funding. This amount represents a "catastrophic reserve fund" to be
utilized for the payment of a center's Part A costs in the event a center ceases
operations and the incurred but not reported reserves are not adequate to
reimburse providers for Part A services rendered. This amount is calculated
monthly by Humana.
The withholdings are used to pay the centers' medical claims, which Humana pays
on the centers' behalf. The remaining amount after claims have been paid is
remitted to the company.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight line method over the estimated useful
lives. (Medical and office equipment - 5 years and Furniture and fixtures - 7
years)
(D) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, 15 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
F-32
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
The Company entered into a non-compete agreement with a former employee and
shareholder. This non-compete agreement is being amortized on a straight line
basis over the life of the agreement which is two years.
The Company entered into three employment/non-compete agreements with three
shareholders. The agreements consist of guaranteed payments regardless if any
services are rendreed. These agreements are being amortized on a straight line
basis over 5 years which is the life of the agreement (3 years) plus the
subsequent non-compete period (2 years).
Deferred organization costs consist principally of legal, consulting and
investment banking fees which were incurred strictly in connection with the
incorporation of FMC and proposed merger with Lehigh. The costs related to the
FMC transaction are being amortized over five years. The costs related to the
subsequent Lehigh merger will begin amortizing when the merger is complete.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset of future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair values less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity. The Company has no
impaired assets at December 31, 1996.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(G) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and supplemental funds is
recognized monthly on the basis of the number of Humana members assigned to the
primary care centers and the contractually agreed-upon rates. The primary care
centers receive monthly payments from Humana after all expenses paid by Humana
on behalf of the centers, estimated claims incurred but not reported and claims
reserve fund balances have been determined. In addition to Humana payments, the
primary care centers receive copayments from commercial members from each office
visit, depending upon the specific plan and options selected and receive
payments from non-Humana members on a fee-for-service basis.
F-33
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are reflected in the consolidated balance sheet
and are based upon costs incurred for services rendered prior to and up to
December 31, 1996. Included are services incurred but not reported as of
December 31, 1996, based upon actual costs reported subsequent to December 31,
1996 and a reasonable estimate of additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to patients
and annual membership fees charged to individuals, families and corporate
members. Membership fees are non-refundable and are recognized as revenue over
the term of the membership. Corporate members are also required to make advance
deposits based upon plan type, number of employees and dependents. The advance
deposits are initially recorded as deferred income and then recognized as
revenue when service is provided. As the advance deposits are utilized,
additional advance deposits are required to be made by corporate members.
FMC-HS will recognize revenue under the management consulting service agreements
on a fee-for-service basis as services are rendered by FMC-HS personnel.
Fee-for-service revenue is reported at the estimated net realizable amounts from
patients and third-party payors as services are rendered.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable and claims reserve funds, other receivables,
prepaid expenses and other current assets, accounts payable and other accrued
expenses, accrued medical claims, loan payable to Humana, loans payable to bank
and obligations to certain stockholders approximate fair value at December 31,
1996 because of the short term maturity of these instruments.
(J) FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are remeasured
into the US dollar functional currency for consolidation and reporting purposes.
Current rates of exchange are used to remeasure assets and liabilities and
revenue and expense are remeasured at average monthly exchange rates prevailing
during the year.
(K) STOP-LOSS FUNDING
The primary care centers are charged a stop-loss funding fee by Humana for the
purpose of limiting a center's exposure to Part A costs and certain Part B costs
associated with a member's heath services.
F-34
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
For the year ended December 31, 1996, the stop-loss threshold for both part A
and Part B costs for Medicare members was $40,000 per member per calendar year
for both SPI and SPI Hillsborough. For commercial members, the stop-loss
threshold for both Part A and part B costs was $20,000 and $15,000 for SPI and
SPI Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible for claims in
excess of the threshold, income and the corresponding expense, both equal to the
stop-loss funding are recognized by SPI and SPI Hillsborough. These amounts are
included in revenue and medical expenses, respectively, in the accompanying
consolidated statement of income. Stop-loss funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$4,733,000.
For Midwest, the stop-loss thresholds for Part A and for Part B costs for
Medicare members were $45,000 and $15,000, respectively, per member per calendar
year and the stop-loss thresholds for Part A and for Part B for commercial
members were $60,000 and $15,000 respectively, per member per calendar year.
(L) MATERNITY FUNDING
The primary care centers are charged a maternity funding fee on commercial
membership for the purpose of limiting the center's exposure to Part A and Part
B costs associated with a commercial member's pregnancy or related illness.
Since the SPI and SPI Hillsborough centers are not responsible for claims in
excess of the amount contributed to the maternity fund, income and expenses both
equal to the maternity fund are recognized by SPI and SPI Hillsborough and are
included in revenue and medical expenses, respectively in the accompanying
consolidated statement of operations. Maternity funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$1,403,000.
(M) SUPPLEMENTAL EARNINGS PER SHARE
On July 9, 1997 the Company merged with Lehigh Group, Inc. As a result of this
merger and the conversion of Preferred Stock and the 1-for-30 reverse stock
split on November 12, 1997, the Company had shares outstanding of 9,021,400
resulting in a net earnings per share of $.04 per share.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1996 consists of the following:
Medical, computer and office equipment $703,793
Furniture and fixtures 37,986
--------
741,779
Less: accumulated depreciation 341,938
---------
Property and equipment, net $399,841
=========
F-35
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1996 consist of:
Goodwill $1,498,908
Employment/non-compete agreements
with executives 964,800
Organization costs 480,337
Noncompete agreement with former
shareholder 200,000
----------
3,144,045
Less: accumulated amortization 408,197
----------
$2,735,848
==========
As stated in note 1, the following transactions created goodwill at December 31,
1996:
AMCMC $1,020,275
BMC and SPI Broward 327,778
Midwest Managed Care 150,855
----------
$1,498,908
==========
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangible assets as well as the amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying value and estimates of useful lives. At this time, the Company believes
that no significant impairment of goodwill or other intangible assets has
occurred and that no reduction of the amortization periods is warranted.
(5) LOANS PAYABLE TO HUMANA
Loans payable to Humana at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Secured loan for $250,000 bearing interest at 9.5%. Payable in 48 monthly
installments beginning in February 1997 of $6,850 which includes principal
and interest. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for the purchase of equipment at the Houston medical
practice. $ 250,000
</TABLE>
F-36
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Secured loan for $75,000 bearing interest at 9.5%. Payable in twelve
monthly installments beginning in February 1997 which includes principal
and interest of $7,172. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for working capital needs of the Houston medical practice. 75,000
Advance of $50,000 bearing interest at 10% per year for the purchase and
installation of a computer system and related training at the Midwest
locations. The loan is due by September 30, 2000. Monthly installments to
Humana will be a minimum of 10% of any positive balance in Midwest's Part A
Fund. In the event no positive balance exists in the Part A fund, Midwest
will make a minimum monthly payment of $1,268 until the loan is repaid.
50,000
--------
Total long-term loans payable to Humana 375,000
Less current installments 97,628
--------
Loans payable to Humana, excluding current installments $ 277,372
===========
</TABLE>
The aggregate maturities of loans payable to Humana for each of the five years
subsequent to December 31, 1996 are as follows:
1997 $ 97,628
1998 81,751
1999 82,688
2000 106,097
2001 6,836
--------
$375,000
========
(6) LOANS PAYABLE TO BANKS
Loans payable to banks at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Unsecured line of credit for $200,000 bearing interest at prime (8.25% at
December 31, 1996). The line of credit is personally guaranteed by several
stockholders of the Company and other individuals. The principal balance is
due on June 2, 1997. Interest is due monthly. The $200,000 drawn under this
line of credit was used primarily for development costs relating to
Midwest. $ 200,000
</TABLE>
F-37
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Line of credit for $1,500,000 bearing interest at 1/2% above prime (8.75%
at December 31, 1996). $900,000 of the line is secured by MedExec's cash
and certain net assets of the Company. Secured assets total $1,237,976 at
December 31, 1996. The principal balance is due on May 31, 1997 and
interest is due monthly. In order to borrow the additional $600,000
(unsecured portion of line), the bank would require the personal guarantee
of a stockholder of the Company. The $550,000 drawn under this line of
credit was used primarily for working capital requirements. 550,000
---------
$ 750,000
=========
</TABLE>
FMC recently obtained a loan commitment in the amount of $3,300,000 from the
same bank which provided the $1,500,000 line of credit. The commitment is for a
120 day loan bearing interest at the prime plus 1/2% (8.75% at December 31,
1996). The purpose of the loan is to provide financing for the Lehigh merger.
The loan is secured by all of the assets of FMC, 50% of the shares of FMC Common
Stock owned by FMC's Chairman and Chief Executive Officer and any and all shares
of Lehigh Common Stock are issuable to FMC.
The various debt agreements contain certain covenants. Under the most
restrictive of these provisions, certain stockholders of the Company must
personally guarantee $600,000 for the $1,500,000 line of credit as well as the
additional $3,300,000 line of credit.
(7) RELATED PARTY TRANSACTIONS
At December 31, 1996, obligations to certain shareholders includes the
following:
<TABLE>
<CAPTION>
<S> <C>
Obligation to pay consulting fees to three stockholders in connection with
the transaction between MedExec and AMC. Obligations have been recorded as
a liability due to the stockholders not having to provide any services for
this consideration to be paid. Payable monthly in the amount of $26,800.
Obligations will be repaid by December 31, 1998. The amount of
consideration paid in 1996 related to these agreements was $321,600. $ 643,200
Credit facility bearing interest at 4.5% from General de Sante
International, plc of up to $1,200,000 to be used for the development of
the clinics of AMCD. $100,000 is to be repaid on demand at any time after
July 10, 2001, $100,000 is to be repaid on demand at any time after August
9, 2001 and $174,596 on demand any time after January 17, 2002, or on the
date GDS subscribes for shares in FMC under the subscription agreement (see
note 12). 374,596
</TABLE>
F-38
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Obligation under non compete agreement with a former employee and
stockholder payable in monthly installments of $8,333 until June 1998 (note
4). 150,000
-------
Total obligations to stockholders 1,167,796
Less current installments 421,600
----------
Total obligations to stockholders, excluding current installments $ 746,196
==========
</TABLE>
The aggregate maturities of obligations to stockholders for each of the five
years subsequent to December 31, 1996 are as follows:
1997 $421,600
1998 371,600
1999 --
2000 --
2001 200,000
Thereafter 174,596
----------
Total $1,167,796
==========
The Company paid salaries or consulting fees to stockholders of approximately
$1,520,700 which is included in the consolidated statement of income for the
year ended December 31, 1996.
Certain stockholders have guaranteed the $200,000 outstanding loan with the
financial institution which is described in note 6. In addition, a stockholder
will guarantee any amount in excess of $900,000 which becomes outstanding
related to the $1,500,000 line of credit described in note 6.
On January 24, 1997 the Company acquired director and officer liability
insurance in the amount of $3,000,000 with coverage expiring on December 5,
1997. Coverage under this policy extends to all duly elected or appointed
directors and officers (past, present and future).
At December 31, 1996, the Company has amounts outstanding from the AMC clinics
under its management agreement with AMCMC which total $462,329.
(8) INCOME TAXES
CURRENT DEFERRED TOTAL
US Federal $256,000 $112,500 $368,500
State and Local 44,000 -- 44,000
-------- -------- --------
$300,000 $112,500 $412,500
======== ======== ========
F-39
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Income tax expense differed from the amounts computed by applying the US
federal income tax rate of 34% to pretax income as a result of the following:
Income tax expense at the statutory rate $250,300
Reduction in valuation allowance (29,300)
Unutilized net operating losses of AMCD 122,000
State taxes, net of federal benefit 31,500
Nondeductible merger costs and meals and entertainment 38,000
--------
Income tax expense recorded in financial statements $412,500
========
The tax effects that give rise to a significant portion of the deferred income
tax assets for the year ended December 31, 1996 are as follows:
Deferred tax assets:
Executive compensation $250,616
Net loss carryforward 58,703
--------
Deferred tax asset 309,319
Valuation allowance (102,403)
--------
Net deferred tax asset 206,916
Deferred tax liabilities:
Goodwill asset 319,416
--------
Net deferred tax liability $112,500
========
The Company has provided a valuation allowance for deferred tax assets as of
December 31, 1996 for $102,403. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
or a portion of the deferred assets will be realized in the near future.
(9) LEASES
The Company has several noncancelable operating leases primarily for
office space and equipment that expire throughout 2001. Future minimum
lease payments required under noncancelable operating leases at
December 31, 1996 are as follows:
F-40
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Year ending
December 31,
------------
1997 $ 349,327
1998 339,834
1999 120,487
2000 55,204
2001 49,656
--------
Total minimum lease payments $914,508
========
Rental expense during 1996 amounted to approximately $259,000.
(10) BUSINESS AND CREDIT CONCENTRATIONS
The Company derives the majority of its revenue from its affiliated
provider agreements with Humana 85% or approximately $45,070,000 of the
revenue of the Company for the year ended December 31, 1996 was derived
from such agreements with Humana. The amount of revenue is based on the
number of members assigned to each of the centers. Humana members
include 10,287 Medicare members and 10,420 commercial members at
December 31, 1996. The fluctuation of the number of members
significantly affects the Company's business. The receivable from
Humana at December 31, 1996 is $7,308,482.
Revenue generated by services provided by the AMC clinics in the CIS
represents 12% or approximately $6,534,000 of the revenue of the
Company for the year ended December 31, 1996.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans") for its domestic
operations. Employees who have worked a minimum of six months or 1000
hours and are at least 21 years of age may participate in the Plans.
Employees may contribute to the Plans up to 14 percent of their annual
salary, not to exceed $9,500 in 1996. The Company's matching
contribution is 25 cents for each dollar of the employee's elected
contribution, up to four percent of the employee's annual salary. The
Company's matching contribution was approximately $35,000 for the year
ended December 31, 1996.
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company and certain stockholders are defendants in a lawsuit
brought on by a stockholder and former employee. The plaintiff is
seeking damages in excess of $1 million. Management, stockholders and
legal counsel for the Company intends to vigorously defend this action.
They are not able to determine the extent of damages, if any, at this
time. Therefore, no accrual has been recorded in the financial
statements at December 31, 1996.
To the best of the Company's knowledge, there are no material claims,
disputes or other unsettled matters (including retroactive adjustments)
concerning third party reimbursements that would have a material effect
on the consolidated financial statements of the Company.
F-41
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
GOVERNMENTAL REGULATIONS
The Company's operations have been and may be affected by various forms
of governmental regulation and other actions. It is presently not
possible to predict the likelihood of any such actions, the form which
such actions may take, or the effect such actions may have on the
Company.
PHYSICIAN CONTRACTS
The Company has entered into employment agreements of two to three
years with its primary care physicians and into contracts with various
independent physicians to provide specialty and other referral services
both on a prepaid and a negotiated fee-for-service basis. Such costs
are included in the consolidated statement of income as medical
expense.
SUBSCRIPTION AGREEMENT
In June 1996, FMC entered into a subscription agreement with GDS by
which GDS has the right to purchase various percentages of interest in
both FMC and its subsidiaries.
MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a claims-made
basis through November 1, 1997 including retrospective coverage for
acts occurring since inception of its operations. Incidents and claims
reported during the policy period are anticipated to be covered by the
malpractice carrier. The Company intends to keep such insurance in
force throughout the foreseeable future. At December 31, 1996, there
are no asserted claims made against the Company that were not covered
by the policy.
Physicians providing medical services to members are provided
malpractice insurance coverage (claim-made basis), including
retrospective coverage for acts occurring since their affiliation with
the Company.
F-42
<PAGE>
Independent Auditors' Report
The Board of Directors
MedExec, Inc.;
SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.:
We have audited the accompanying combined balance sheets of MedExec, Inc. and
subsidiaries; SPI Managed Care, Inc.; and SPI Managed Care of Hillsborough
County, Inc. as of December 31, 1995 and 1994, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements referred to above present
fairly, in all material respects, the combined financial position of MedExec,
Inc. and subsidiaries; and SPI Managed Care, Inc.; and SPI Managed Care of
Hillsborough County, Inc. as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996, except as to note 15,
which is as of December 23, 1996
F-43
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
Combined Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 198,763 468,528
Humana IBNR receivable 2,062,924 2,848,518
Due from affiliates and related parties, net 54,565 196,745
Claims reserve funds 116,212 126,357
Prepaid expenses and other current assets 82,413 37,269
Deferred income taxes (note 12) -- 51,713
--------------------- -----------------------
Total current assets 2,514,877 3,729,130
Property and equipment, net (note 4) 298,060 207,199
Deferred income taxes (note 12) -- 8,287
Investments in other affiliated entities (note 3) 229,094 178,968
Intangible assets, net 2,547 4,896
--------------------- -----------------------
$ 3,044,578 4 ,128,480
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses 594,822 556,366
Accrued medical claims, including amounts incurred
but not reported 1,880,318 2,484,258
Due to Humana 192,143 56,152
Loan payable to Humana 50,000 --
Loan payable to bank 100,000 --
Income taxes payable -- 60,000
--------------------- -----------------------
Total current liabilities 2,817,283 3,156,776
--------------------- -----------------------
Commitments and contingencies (note 13)
Stockholders' equity (notes 8 and 9):
Capital stock 1,500 1,500
Additional paid-in capital 1,200 1,200
Retained earnings 224,595 969,004
--------------------- -----------------------
Total stockholders' equity 227,295 971,704
---------------- -----------------------
$ 3,044,578 4,128,480
===================== =======================
</TABLE>
See accompanying notes to combined financial statements.
F-44
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF OPERATIONS
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ---------------------- --------------
<S> <C> <C> <C>
Revenue (note 9) $22,671,902 21,317,887 11,086,690
Medical expenses 18,443,943 16,567,554 8,404,521
-------------- ---------------------- --------------
Gross profit 4,227,959 4,750,333 2,682,169
-------------- ---------------------- --------------
Operating expenses (note 9):
Salaries and related benefits 2,434,241 1,650,970 670,536
Depreciation and amortization 68,499 50,408 46,676
Other 2,131,639 1,720,198 944,237
-------------- ---------------------- --------------
Total operating expenses 4,634,379 3,421,576 1,661,449
-------------- ---------------------- --------------
Operating income (loss) (406,420) 1,328,757 1,020,720
-------------- ---------------------- --------------
Other (expense) income:
Gain (loss) on equity investments (note 3) 50,126 28,260 (149,295)
Interest income 11,310 9,593 4,071
Loss on Dominion Healthnet, Inc. (note 3) -- -- (80,009)
Other, net (19,425) (2,948) 7,356
-------------- ---------------------- --------------
Other income (expense), net 42,011 34,905 (217,877)
-------------- ---------------------- --------------
Net income (loss) $ (364,409) 1,363,662 802,843
============== ====================== ==============
</TABLE>
(56)
See accompanying notes to combined financial statements.
F-45
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
Capital Additional paid- Total
stock in capital Retained Due to stockholders'
(NOTE 8) (NOTE 8) EARNINGS STOCKHOLDERS EQUITY
------ ------ -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 900 1,200 143,701 37,000 182,801
Net income -- -- 802,843 -- 802,843
Dividend distributions -- -- (170,745) -- (170,745)
Issuance of stock 100 -- -- -- 100
Proceeds from due to stockholders -- -- -- 583,112 583,112
----- -------- ---------- -------- ------------
Balance, December 31, 1993 1,000 1,200 775,799 620,112 1,398,111
Net income -- -- 1,363,662 -- 1,363,662
Distribution of Midway Airlines stock, at cost -- -- (200,444) (599,556) (800,000)
Dividend distributions -- -- (970,013) -- (970,013)
Issuance of stock 500 -- -- -- 500
Repayment of due to stockholders, net -- -- -- (20,556) (20 ,556)
----- -------- -------- -------- ------------
Balance, December 31, 1994 1,500 1,200 969,004 -- 971,704
Net loss -- -- (364,409) -- (364,409)
Dividend distributions -- -- (380,000) -- (380,000)
----- ------- ---------- -------- -------------
Balance, December 31, 1995 $1,500 1,200 224,595 -- 227,295
===== ===== ========== ======== ============
</TABLE>
See accompanying notes to combined financial statements.
F-46
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF CASH FLOWS
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(364,409) 1,363,662 802,843
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 68,499 50,408 46,676
Deferred income taxes -- (60,000) --
Loss on disposal of fixed assets -- -- 801
(Gain) loss on equity investments (50,126) (28,260) 149,295
Write-off of investments -- 597 --
(Increase) decrease in assets:
Humana IBNR receivable 785,594 (1,547,044) (764,831)
Due from affiliates and related parties 142,180 (177,572) 53,369
Claims reserve funds 10,145 13,217 (115,742)
Prepaid expenses and other current assets 14,856 (33,076) (3,653)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses 38,456 393,636 85,077
Accrued medical claims, including amounts incurred
but not reported (603,940) 1,359,770 583,266
Due to Humana 135,991 2,822 14,779
Income taxes payable (60,000) 60,000 --
-------- ----------- --------
Net cash provided by operating activities 117,246 1,398,160 851,880
-------- ----------- --------
Cash flows from investing activities:
Capital expenditures (157,011) (95,559) (133,922)
Proceeds from sale of fixed assets -- -- 19,900
Purchase of investments -- -- (1,100,600)
------- ---------- ----------
Net cash used in investing activities (157,011) (95,559) (1,214,622)
------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock -- 500 100
Proceeds from loan payable to Humana 50,000 -- --
Proceeds from loan payable to bank 100,000 -- --
Dividend distributions (380,000) (970,013) (170,745)
Due to stockholders -- (20,556) 583,112
-------- -------- --------
Net cash (used in) provided by financing activities (230,000) (990,069) 412,467
------- ---------- --------
(Decrease) increase in cash and cash equivalents (269,765) 312,532 49,725
Cash and cash equivalents, beginning of year 468,528 155,996 106,271
------- ------- -------
Cash and cash equivalents, end of year $198,763 468,528 155,996
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 60,000 -- --
======== ======= =======
</TABLE>
Supplemental schedule of noncash investing and operating activities:
MedExec, Inc. distributed its $800,000 investment in Midway Airlines stock
as a dividend to its shareholders during the year ended December 31, 1994.
See accompanying notes to combined financial statements.
F-47
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) ORGANIZATION AND OPERATIONS
(A) ORGANIZATION
The accompanying combined financial statements include the
accounts of MedExec, Inc. and subsidiaries ("MedExec"); SPI
Managed Care, Inc. ("SPI"); and SPI Managed Care of
Hillsborough County, Inc. ("SPI Hillsborough") (collectively,
the "Company"), which are affiliated through common
stockholders and the same management. SPI and SPI Hillsborough
are 100%-owned by MedExec stockholders. (55)
MedExec was incorporated on March 14, 1991.
Dominion Healthnet, Inc. ("Dominion") was incorporated on
September 13, 1991. MedExec owned 55 percent of Dominion at
December 31, 1995, and 1994.
HCO Miami, Inc. ("HCO Miami") was incorporated on June 18,
1993. MedExec owned 70 percent and SPI owned 20 percent of HCO
Miami at December 31, 1995 and 1994.
Midwest Managed Care, Inc. ("Midwest") was incorporated on
March 29, 1995. MedExec owned 66.67 percent of Midwest at
December 31, 1995.
SPI, formerly known as Surgical Park, Inc. was incorporated on
February 19, 1988. Surgical Park, Inc. changed its name
pursuant to an amendment to its Articles of
Incorporation on May 7, 1990.
SPI Hillsborough was incorporated on April 20, 1993.
(B) NATURE OF OPERATIONS (57-61)
SPI and SPI Hillsborough operate in the state of Florida and
Midwest (which commenced operations during 1995) operates in
the states of Illinois and Indiana. SPI and SPI Hillsborough
provide health care services subject to affiliated provider
agreements entered into with Humana Medical Plan, Inc.; Humana
Health Plan of Florida, Inc.; Humana Health Insurance Company
of Florida, Inc. and their affiliates. Midwest provides health
care services subject to affiliated provider agreements
entered into with Humana Health Plan, Inc.; Humana Health
Chicago, Inc.; Humana Health Chicago Insurance Company; Humana
Insurance Company and their affiliates. All of the Humana
entities will collectively be known as "Humana". The Company
is dependent on Humana for the majority of its operations. For
the years ended December 31, 1995, 1994 and 1993, 96 percent,
95 percent, and 95 percent, respectively of the Company's
revenue are from such
F-48
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
agreements with Humana. Health services are provided to Humana
members through SPI, SPI Hillsborough and Midwest's primary
care medical centers and its network of physicians and health
care specialists.
SPI operates two centers in Dade County, Florida: in Kendall
("Kendall") and Cutler Ridge ("Cutler Ridge") at December 31,
1995 and 1994.
At December 31, 1994, SPI Hillsborough operated two centers in
Hillsborough County, Florida: in Brandon ("Brandon") and Plant
City ("Plant City"). Effective August 31, 1995, Humana
terminated its Brandon contract with SPI Hillsborough.
Included in accrued medical claims at December 31, 1995, is
approximately $103,000 pertaining to Brandon's open claims
through the termination date. The Brandon center had revenue
of approximately $3,521,000, $3,943,000, and $208,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Midwest operates one center in Hammond, Indiana ("Hammond").
Dominion provides networks of hospitals and doctors to
international travel assistance companies outside the United
States. At December 31, 1995, Dominion had one contract with a
Canadian insurance company to care for its insured traveling
to the United States.
HCO Miami provides utilization review and case management
services for HMO and PPO members of affiliated companies.
(C) AFFILIATED PROVIDER AGREEMENTS
Effective April 1, 1990 and September 1, 1990, SPI through the
Cutler Ridge and Kendall centers, respectively, entered into
provider agreements with Humana, which will continue
indefinitely unless terminated according to certain provisions
of the agreements. Such agreements specify that either party
may elect to terminate the agreements, with or without cause,
at any time upon giving 60 days written notice. In addition,
these agreements may be terminated by mutual written consent
of both parties at any time. Amendments to the original
provider agreements with Humana were entered into effective
September 1, 1991 and January 1, 1993 for the Cutler Ridge and
Kendall centers, respectively under full-risk agreements.
The Brandon and Plant City centers entered into five-year
non-risk provider agreements with Humana effective June 1,
1993 and January 1, 1994, respectively. Under these
agreements, the Brandon and Plant City centers are responsible
only for primary (in- office) medical services. These
agreements allow for similar termination provisions to the
agreements for the other centers, except that either party may
elect to terminate the
F-49
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
agreements without cause after the first two years upon giving
six months written notice. Amendments to the aforementioned
provider agreements with Humana were entered into effective
May 1, 1994 under full-risk agreements. The Brandon agreement
with Humana was terminated effective August 31, 1995.
The Hammond center entered into a three-year risk provider
agreement with Humana effective October 1, 1995 with an
automatic three-year renewal. However, the Hammond center is
operating under a non-risk amendment ("Amendment") to this
agreement and is responsible only for primary (in-office)
medical services. The Hammond center will continue to operate
under the Amendment until the earlier of the date on which
Midwest achieves a certain membership level or one calendar
year from the commencement date of the agreement, October 1,
1996. This agreement allows for similar termination provisions
to the agreements for the other centers, except that either
party may elect to terminate the agreement at any anniversary
date of the agreement upon giving at least six months written
notice.
Services to be provided by the SPI, SPI Hillsborough and
Midwest centers include medical and surgical services,
including all procedures furnished in a physician's office
such as X-rays, nursing services, blood work and other
incidentals, drugs and medical supplies. SPI, SPI Hillsborough
and Midwest centers are responsible for providing all such
services and for directing and authorizing all other care,
including emergency and inpatient care for Humana members. The
SPI and SPI Hillsborough centers are financially responsible
for all out-of-area care rendered to a member and provides
direct care as soon as the member is able to return to the
designated medical center.
Humana has agreed to pay the SPI and SPI Hillsborough centers
monthly for services provided to members based on a
predetermined amount per member ("capitation"), comprised of
in-hospital services and other services defined by contract
("Part A"), in- office ("Primary") and other medical services
defined by the agreements ("Part B"). Humana has agreed to pay
the Midwest center a guaranteed monthly amount ("guaranteed
payment") to cover the costs of providing primary care
services and to cover Midwest's other operating costs. The
guaranteed payments will be made until the earlier of the date
on which the Midwest center achieves a certain membership
level or one calendar year from the commencement date of the
agreement at which point Humana will pay Midwest capitation.
Midwest shall not be at risk for Parts A and B until Midwest
has been assigned certain membership.
(D) HUMANA IBNR RECEIVABLE (63)
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A, Part B and supplemental
funding in order to cover claims incurred but
F-50
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
not reported or paid. This amount is to be used by Humana to
pay the centers Part A, Part B and supplemental costs. The
amounts withheld by Humana to cover incurred but not reported
or paid claims varies by center based on the history of the
respective center and is determined solely by Humana. The
amounts withheld are used to pay the centers' medical claims
which Humana pays on the centers' behalf. The remaining amount
after claims have been paid is remitted to the Company. (See
note 1(f))
Management does not believe it has a significant exposure to
effects related to third-party reimbursement programs and the
related revenue recognition policy because they generally
apply to hospitals. Furthermore, FMC has Medicare and Medicaid
contracts only in regard to one facility and fee-for-service
in only one facility. There is a risk, however, even though
FMC is not a direct recipient of third-party payor
arrangements because Medicare and Medicaid may change its
payments.
(E) DUE FROM AFFILIATES AND RELATED PARTIES
Due from affiliates and related parties represents current
amounts receivable from affiliates to cover their operating
expenses.
(F) CLAIMS RESERVE FUNDS
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A capitation funding. This
amount represents a "catastrophic reserve fund" to be utilized
for the payment of the center's Part A costs in the event a
center ceases operations and the incurred but not reported
reserves are not adequate to reimburse providers for Part A
services rendered. This amount is calculated monthly by
Humana.
(G) DUE TO HUMANA
Due to Humana represents amounts advanced to SPI and SPI
Hillsborough by Humana to cover certain operating expenses. No
interest is charged by Humana. No due date is specified on the
amounts advanced.
(H) PHYSICIAN CONTRACTS
SPI, SPI Hillsborough and Midwest have entered into employment
agreements with its primary care physicians and into contracts
with various independent physicians to provide specialty and
other referral services both on a prepaid and a negotiated
fee-for-service basis. Midwest has also entered into a
consulting agreement with a physician. Prepaid physicians'
service costs are based upon a fixed fee per member, payable
on a monthly
F-51
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
basis. Such costs are included in the accompanying combined
statements of income as salaries and related benefits.
(I) MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a
claims-made basis through July 1996, including retrospective
coverage for acts occurring since inception of its operations.
Incidents and claims reported during the policy period are
anticipated to be covered by the malpractice carrier. The
Company intends to keep such insurance in force throughout the
foreseeable future.
At December 31, 1995, there are no asserted claims against the
Company that were not covered by the policy. Management of the
Company has accrued approximately $181,100 for incidents which
may have occurred but have yet to be identified under its
incident reporting system, based on industry experience.
Physicians providing medical services to members are provided
malpractice insurance coverage (claims-made basis), including
retrospective coverage for acts occurring since their
affiliation with the Company.
(J) MEMBERSHIP
Humana members assigned to SPI and SPI Hillsborough centers
include approximately 3,100, and 4,200 Medicare members,
respectively, and 3,400, and 5,300 commercial members,
respectively, at December 31, 1995 and 1994. At December 31,
1995, Humana members assigned to the Midwest center include
approximately 60 commercial and 200 Medicare members.
(K) STOP-LOSS FUNDING
The SPI and SPI Hillsborough centers are charged a stop-loss
funding fee by Humana for the purpose of limiting a center's
exposure to Part A costs and certain Part B costs associated
with a member's health services. At December 31, 1995, Midwest
was under a non-risk agreement with Humana, and as such no
stop-loss funding fees were charged to the Midwest center.
For the year ended December 31, 1993, the stop-loss threshold
which applies to Part A costs only, for Medicare members of
SPI and SPI Hillsborough, was $20,000 and $25,000,
respectively, per hospital stay within certain admitting-time
criteria. For commercial members, the threshold is $15,000 for
SPI and SPI Hillsborough per calendar year for both Part A and
Part B costs. For the year ended December 31, 1994, the stop-
F-52
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
loss threshold, which applies to Part A costs only, for
Medicare members was $28,000 for SPI and $32,600 for SPI
Hillsborough per calendar year. For commercial members, the
threshold is $20,000 for SPI and $28,000 for SPI Hillsborough
per calendar year for both Part A and Part B costs. For the
year ended December 31, 1995, the stop-loss threshold for both
Part A and Part B costs for Medicare members was $40,000 per
member per calendar year for both SPI and SPI Hillsborough.
For commercial members, the stop-loss threshold for both Part
A and Part B costs was $20,000 and $15,000 for SPI and SPI
Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible
for claims in excess of the threshold, income and the
corresponding expense, both equal to the stop-loss funding are
recognized by SPI and SPI Hillsborough. These amounts are
included in revenue and medical expenses, respectively, in the
accompanying combined statements of income. Stop-loss funding
for the SPI and SPI Hillsborough centers for the years ended
December 31, 1995, 1994 and 1993 was approximately $2,115,000,
$1,919,000, and $956,000, respectively.
The Company is responsible for payment of medical servicers
provided to is members by third party providers. As a result
of its agreements with Humana, which limits the Company's
exposure as to certain catastrophic and maternity claims, the
Company is reimbursed for the amounts in excess of certain
thresholds. Therefore, these amounts are shown as both
revenues and expenses.
(L) MATERNITY FUNDING
The SPI and SPI Hillsborough centers are charged a maternity
funding fee on commercial membership for the purpose of
limiting the centers' exposure to Part A and Part B costs
associated with a commercial member's pregnancy or related
illness. Since the SPI and SPI Hillsborough centers are not
responsible for claims in excess of the amount contributed to
the maternity fund, income and expenses both equal to the
maternity funding are recognized by SPI and SPI Hillsborough
and are included in revenue and medical expenses,
respectively, in the accompanying combined statements of
income. Maternity funding for the SPI and SPI Hillsborough
centers for the years ended December 31, 1995, 1994 and 1993
was approximately $825,000, $917,000, and $499,000,
respectively. At December 31, 1995, Midwest was under a
non-risk agreement with Humana and as such no maternity
funding fees were charged to the Midwest center.
F-53
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying combined financial statements include the
accounts of the companies listed in note 1(a) which are
related through common ownership and management. All
significant intercompany balances and transactions have been
eliminated in the consolidation of MedExec, Inc. and
subsidiaries, and the subsequent combination of MedExec, SPI
and SPI Hillsborough.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the combined statements of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(D) INVESTMENTS IN OTHER AFFILIATED ENTITIES
The Company accounts for equity investments with a percentage
of ownership between 20 percent and 50 percent under the
equity method of accounting, which requires the recognition by
the Company of its pro rata share of the investee's income or
loss. Equity investments of less than 20 percent are carried
at cost.
(E) INTANGIBLE ASSETS
Intangible assets arose in business acquisitions. These
intangibles are being amortized on a straight-line basis over
five years. At December 31, 1995 and 1994, accumulated
amortization was approximately $9,200 and $6,600,
respectively.
(F) INCOME TAXES
MedExec, Inc. qualified as an S corporation for income tax
purposes at December 31, 1995, and 1994. MedExec, Inc. uses
accelerated depreciation methods for reporting
F-54
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
taxable income or losses which are passed through to
stockholders under the Company's S Corporation status. As
stated in footnote 14 to these combined financial statements,
effective January 1, 1996 MedExec's tax status automatically
changed from an S Corporation to a C Corporation. The effect
of this change will result in additional state and federal
deferred income taxes attributable to the temporary
differences at the time of change to be recorded as a deferred
tax liability with a corresponding reduction in income. The
deferred tax liabilities at December 31, 1995 and 1994 were
approximately $13,500 and $126,000. The amount of the
liability at December 31, 1995 would be payable in future
years as the net cumulative temporary differences reverse.
SPI qualified as an S corporation for income tax purposes at
December 31, 1993. In May 1994, the stockholders of SPI
voluntarily revoked SPI's election to be treated as an S
corporation pursuant to the Internal Revenue Code Section
1362(d).
Effective January 1, 1993, SPI Hillsborough and Dominion
adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Effective May 1994, SPI adopted the provisions of SFAS
No. 109. The adoption of SFAS No. 109 had no cumulative effect
on the combined statements of income for the years ended
December 31, 1994 and 1993. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to be applied to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Under federal income tax principles, the Company cannot file a
consolidated income tax return. Thus, losses of one entity may
not offset income of another entity within the controlled
group.
(G) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and
supplemental funds are recognized monthly on the basis of the
number of Humana members assigned to the SPI and SPI
Hillsborough centers and the contractually agreed-upon rates.
The SPI and SPI Hillsborough centers receive monthly payments
from Humana after all medical expenses paid by Humana on
behalf of the SPI and SPI Hillsborough centers, estimated
claims incurred but not reported and claims reserve fund
balances have been determined. Medical expenses paid by Humana
on behalf of the Company, accordingly, are included in the
F-55
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
combined statements of operations. During 1995, Midwest
recognizes revenue based on the gross monthly guaranteed
payment amount. The Midwest center receives a net monthly
payment from Humana after all expenses paid by Humana on
behalf of the Midwest center have been determined. In addition
to Humana payments, the SPI, SPI Hillsborough and Midwest
centers receive copayments from commercial members for each
office visit, depending upon the specific plan and options
selected and receive payments from non-Humana members on a
fee-for-service basis.
Medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims for SPI and
SPI Hillsborough as reflected in the combined balance sheets
are based upon costs incurred for services rendered prior to
and up to the combined balance sheet date. Included are
services incurred but not reported as of the combined balance
sheet date based upon actual costs reported subsequent to the
combined balance sheet date and a reasonable estimate of
additional costs.
In the accompanying combined statements of operations, medical
expenses include amounts paid to hospitals, nursing care and
rehabilitative facilities, home health services, diagnostic
services, pharmacy costs, physician referral fees, and
hospital based physician costs.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(I) RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 financial statements have
been reclassified to conform with the 1995 presentation.
(3) INVESTMENTS IN OTHER AFFILIATED ENTITIES
At December 31, 1993, MedExec had a 30 percent investment in HCO
Networks, Inc. ("HCON"), a claims management company. MedExec has
accounted for its initial investment of $300,000 under the equity
method. For the years ended December 31, 1995, 1994 and 1993, MedExec's
equity interest in the net income (loss) of HCON was approximately
$50,000, $28,000 and ($150,000), respectively.
F-56
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31, 1993, MedExec had an $800,000 investment in Midway
Airlines ("Midway"), which represented approximately 16 percent
ownership in Midway. The Company has accounted for its investment in
Midway under the cost method. During the year ended December 31, 1994,
the Company distributed as a dividend to its stockholders its
investment in Midway. The recorded value of the investment approximated
the fair value at the time of distribution.
At December 31, 1995 and 1994, MedExec had a 55 percent interest in
Dominion. Dominion has been consolidated in the accompanying combined
financial statements.
MedExec also has a 50 percent investment in SPI Managed Care of
Broward, Inc. ("SPI Broward"), a health care management company, and a
23.75 percent investment in Broward Managed Care, Inc. ("BMC"), which
operates two Humana primary care health centers. At December 31, 1995
and 1994, MedExec's investment in SPI Broward and BMC is $0 under the
equity method of accounting.
F-57
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Estimated
1995 1994 Useful Lives
---- ---- ------------
Medical and office equipment $453,035 267,578 5 years
Furniture and fixtures 32,276 68,426 7 years
------- -------
485,311 336,004
Less accumulated depreciation 187,251 128,805
------- -------
Property and equipment, net $298,060 207,199
======= =======
(5) LOAN PAYABLE TO HUMANA
Loan payable to Humana represents funds advanced to Midwest for the
purchase and installation of a computer system and related training.
The loan is due by September 30, 2000 and is payable in monthly
installments beginning the first month during which Midwest is at full
risk under the terms of the Humana provider agreement. Monthly
installments to Humana will be a minimum of 10 percent of any positive
balance in Midwest's Part A fund. In the event no positive balance
exists in the Part A fund on or at any time after September 30, 1996,
Midwest shall make a minimum monthly payment of $1,268 until the loan
is repaid. Interest is payable at 10 percent per year unless the note
is paid in full by Midwest by September 30, 1996 at which point any
interest owed to Humana will be waived. Management believes that it
will repay the loan before September 30, 1996 and as such has not
accrued any interest at December 31, 1995. The loan is secured by the
computer equipment which has a book value of approximately $55,000 at
December 31, 1995.
(6) LOAN PAYABLE TO BANK
At December 31, 1995, Midwest had a $200,000 unsecured line of credit
bearing interest at prime. The line of credit is personally guaranteed
by all of the stockholders of MedExec at December 31, 1995. The
principal balance is due October 1, 1996, and interest is due monthly.
At December 31, 1995, $100,000 was drawn under this line of credit and
was used primarily for development costs relating to Midwest.
F-58
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(7) LEASES
Future minimum lease payments required under non cancelable operating
leases at December 31, 1995 are as follows:
Year ended Operating
DECEMBER 31, LEASES
1996 $182,327
1997 188,584
1998 193,875
1999 3,968
Thereafter --
--------
Total minimum lease payments $568,754
========
Rent expense incurred under an assigned office lease agreement for the
years ended December 31, 1995, 1994 and 1993 amounted to approximately
$186,000, $70,000, and $54,000, respectively.
(8) Capital Stock
The shares' authorized, issued, related par value and additional
paid-in capital for each of the combined companies at December 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
Stock Stock Stock total Additional
Authorized Issued par value paid-in capital
---------- ------ --------- ---------------
<S> <C> <C> <C>
MedExec, Inc. 500 500 $ 500 700
SPI Managed Care, Inc. 500 500 500 500
SPI Managed Care of Hillsborough
County, Inc. 1,000 500 500 --
------ -----
$ 1,500 1,200
===== =====
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company paid salaries to stockholders of approximately $1,389,000,
$772,600, and $652,000 which are included in the combined statements of
income for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-59
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The Company recorded $111,459 and $225,288 in administration fee
revenue from SPI Broward during the years ended December 31, 1995 and
1994, respectively.
The Company recorded approximately $162,000 and $116,050 in utilization
revenue from BMC during the years ended December 31, 1995 and 1994,
respectively.
The Company had receivables from affiliates and related parties of
$59,023 and $196,745 at December 31, 1995 and 1994, respectively, and a
payable to related parties of $4,458 at December 31, 1995.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, accounts
receivable, prepaid expenses and other current assets, accounts payable
and other accrued expenses, loan payable to Humana and loan payable to
bank approximate fair value at December 31, 1995 because of the short
maturity of these instruments.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans"). Employees who have
worked a minimum of six months or 1,000 hours and are at least 21 years
of age may participate in the Plans. Employees may contribute up to 14
percent of their annual salary, not to exceed $9,240 in 1995 and 1994,
and $8,994 in 1993, to the Plans. The Company's matching contribution
is 25 cents for each dollar of the employee's elected contribution, up
to four percent of the employee's annual salary. The Company's matching
contribution was approximately $21,000, $14,000, and $8,000 in 1995,
1994 and 1993, respectively.
(12) INCOME TAXES
Income tax expense consists of the following:
1995 1994 1993
---- ---- ----
Current expense (benefit):
federal and state $(120,279) 60,000 --
Deferred expense (benefit) 120,279 (60,000) --
------- ------- ------
$ -- -- --
========= ======== ======
F-60
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
A reconciliation of income tax expense and the amount that would be computed
using the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- -------------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)at the
statutory rate (137,839) (34%) 463,645 34% 272,967 34%
S corporation income taxed
at the stockholder level 95,277 23% (532,270) (39)% (292,767) (37)%
Change in the beginning-
of-the year balance of the
valuation allowance for
deferred tax assets
allocated to income tax
expense 42,562 11% 68,625 5% 19,800 3%
-------- --- --------- ----- --------- ----
$ -- -- -- -- -- --
======== === ========= ====== ========= =====
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets and deferred tax liabilities of those entities for
which no Subchapter S election is in effect at December 31, 1995 and 1994, are
presented as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Deferred tax assets:
<S> <C> <C>
Revenue and expenses recognized for financial
reporting purposes in a different period than
for income tax purposes $ 7,646 127,925
Net loss carryforward 123,341 20,500
------- -------
Total deferred tax assets 130,987 148,425
Less valuation allowance (130,987) (88,425)
-------- --------
Net deferred tax asset -- 60,000
Deferred tax liabilities -- --
======= ======
Net deferred tax asset $ -- 60,000
======= ======
</TABLE>
F-61
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The valuation allowance for deferred tax assets as of January 1, 1994
was $19,800. The net change in the valuation allowance for the years
ended December 31, 1995 and 1994 is $42,562 and $68,625, respectively.
The Company reclassed $60,000 of its deferred tax asset as of December
31, 1995 to current tax receivable upon utilization of its net
operating loss.
At December 31, 1995, the companies not qualifying as S corporations,
collectively had a net operating loss carryforward of approximately
$486,000 for tax purposes, which expire in 2009.
(13) COMMITMENTS AND CONTINGENCIES
(A) GOVERNMENTAL REGULATION
The Company's operations have been and may continue to be
affected by various forms of governmental regulation and other
actions. It is presently not possible to predict the
likelihood of any such actions, the form which such actions
may take, or the effect such actions may have on the Company.
(B) STOCKHOLDER AGREEMENTS
The Company entered into employment agreements and change in
control severance agreements with the stockholders during
1994. Such agreements are in effect through April 1, 1999.
(14) SUBSEQUENT EVENTS
Effective January 1, 1996, the Company entered into an agreement with
First Medical Corporation ("FMC"). All of the outstanding shares of the
Company were converted into shares of FMC. In exchange for and in
conversion of all of the issued and outstanding shares of the Company,
FMC has issued and delivered common shares of FMC to the stockholders
of the Company.
Effective January 2, 1996, the Company acquired an additional one
percent interest in SPI Broward from Broward Medical Management ("BMM")
for $1.00 and an equal split of the profits of SPI Broward. Effective
January 2, 1996, the Company acquired an additional 27.25 percent
interest in Broward Managed Care from BMM for $100,000.
Effective January 1, 1996, the MedExec tax status automatically changed
from an S Corporation to a C Corporation as a result of its merger into
FMC. See Note 2(f) above.
On April 4, 1996, the Company sold its investment in HCON for $300,000,
resulting in a gain of $40,967.
F-62
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Effective February 1, 1996, the Company began operations in its Durham
center located in Houston, Texas.
The Company has entered into various employment and management services
agreements throughout 1996.
(15) OTHER MATTERS
In October, 1996 FMC entered into a merger agreement with The Lehigh
Group, Inc. ("Lehigh") whereby upon merger FMC would control
approximately 96 percent of the merged company. In connection with the
proposed merger, which is subject to stockholder approval of both
companies, FMC and Lehigh have been named in a lawsuit. In the opinion
of FMC and its legal counsel, such suit will not have a material effect
on the financial statements of FMC, if not resolved favorably.
In June, 1996 FMC entered into a subscription agreement with Generale
De Sante International, PLC ("GDS") by which GDS has the right to
purchase various percentages of interest in both FMC and its
subsidiaries.
F-63
<PAGE>
EXHIBIT INDEX
EXHIBIT
2.1 Agreement and Plan of Merger, dated as of October 28, 1996, between the
Registrant, the Registrant Acquisition Corp. and First Medical Corporation, as
amended (incorporated by reference to Exhibit 2.1 to the Registrants Proxy
Statement for a Special Meeting of Stockholders to be held July 9, 1997).
3(a) Restated Certificate of Incorporation, By-Laws and Amendments to By-Laws
(incorporated by reference to Exhibits A and B to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1970. Exhibits 3 and 1,
respectively, to the Registrant's Current Reports on Form 8-K dated September 8,
1972 and May 9, 1973, and Exhibit 3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1980).
3(b) Certificate of Amendment to Restated Certificate of Incorporation dated
September 30, 1983 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1985).
3(C) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on October
31, 1985 (incorporated by reference to Exhibit 4 (C) to the Registrant's Current
Report on Form 8-K dated November 7, 1985).
3(d) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on January
2, 1986 (incorporated by reference to Exhibit 3(d) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1985).
3(e) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on June 4,
1986 (incorporated by reference to Exhibit 4 (a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1986).
3(f) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on March
15, 1991 (incorporated by reference to Exhibit 3 (g) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990).
3(g) Certificate of Amendment to Certificate of Incorporation of the Registrant
filed with the Secretary of State of the State of Delaware on December 27, 1991
(incorporated by reference to Exhibit 3(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991).
3(h) Certificate of Amendment to Certificate of Incorporation of the Registrant
filed with the Secretary of State of the State of Delaware on January 27, 1995
(incorporated by reference to Exhibit 3(i) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
3(i) Form of Certificate of Designation of the Series A Convertible Preferred
Stock.
3(j) Amended and Restated By-Laws of the Registrant, as amended to date
(incorporated by reference to Exhibit 3(ii) to the Registrant's Current Report
on Form 8-K dated July 17, 1996).
4(a) Form of Indenture, dated as of October 15, 1985, among Registrant, NICO,
Inc. and J. Henry Schroder Bank & Trust the Registrant, as Trustee, including
therein the form of the subordinated debentures to which such Indenture relates
(incorporated by reference to Exhibit 4(a) to the Registrant's Current Report on
Form 8-K dated November 7, 1985).
E-1
<PAGE>
4(b) Amendment to Indenture dated as of March 14, 1991 referenced to in Item
4(b) (1) (incorporated by reference to Exhibit 4(b) (2) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990).
4(C) Indenture dated as of March 15, 1991 (the "class B Note Indenture") among
the Registrant, NICO, the guarantors signatory thereto, and Continental Stock
Transfer and Trust the Registrant, as Trustee, pursuant to which the 8% Class B
Senior Secured Redeemable Notes due March 15, 1999 of NICO were issued together
with the form of such Notes (incorporated by reference to Exhibit 4(i) to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
4(d) First Supplemental Indenture dated as of May 5, 1993 between NICO and
Continental Stock Transfer & Trust the Registrant, as trustee under the Class B
Note Indenture (incorporated by reference to Exhibit 4(h) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993).
4(e) Form of indenture between the Registrant, NICO and Shawmut Bank, N.A., as
Trustee, included therein the form of Senior Subordinated Note due April 15,
1998 (incorporated by reference to Exhibit 4(b) to Amendment No. 2 to the
Registrant's Registration Statement on Form S-2 dated May 13, 1988).
10(a) Guaranty of LVI Environmental dated as of May 5, 1993 (incorporated by
reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993).
10(b) Indemnification Agreement dated as of May 5, 1993 among LVI Environmental,
the Registrant and certain directors and officers of the Registrant
(incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993).
10(C) Assumption Agreement dated as of May 5, 1993 among the Registrant, NICO
and LVI Holding for the benefit of holders of certain securities of Hold-Out
Notes (as defined therein) (incorporated by reference to Exhibit 10(i) to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10(d) Exchange Offer and Registration Rights Agreement dated s of March 15, 1991
made by the Registrant in favor of those persons participating in the
Registrant's exchange offers (incorporated by reference to Exhibit 10 (j) to the
Registrant's Annual Report on Form 10-K/A Amendment #2 for the year ended
December 31, 1993).
10(e) Employment Agreement between the Registrant and Salvatore J. Zizza dated
August 22, 1994 (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange Commission in
September 1994).
10(f) Options of Mr. Zizza to purchase an aggregate of 10,250,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(g) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Zizza and the Registrant (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(h) Consulting Agreement dated as of August 22, 1994 between Dominic Bassani
and the Registrant (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(i) Warrants of Mr. Bassani to purchase an aggregate of 7,750,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
E-2
<PAGE>
10(j) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Bassani and the Registrant (incorporated by reference to Exhibit 10.6 to the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(k) Form of Registration Rights Agreement dated as of August 22, 1994 among
the Registrant and the investors in the Private Placement (incorporated by
reference to Exhibit 10.7 to the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission in September 1994).
10(l) Warrant of Goldis Financial Group, Inc., to purchase an aggregate of
386,250 shares of Common Stock of the Registrant (incorporated by reference to
Exhibit 10.8 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(m) Employment Agreement between the Registrant and Robert A. Bruno dated
January 1, 1995 (incorporated by reference to Exhibit 10(m) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995).
10(n) Subordinated debenture dated March 28, 1996 between the Registrant and
Macrocom Investors, LLC (incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10(o) Option Letter Agreement, dated October 29, 1996, between Salvatore J.
Zizza and First Medical Corporation (incorporated by reference to Exhibit 99.7
to the Registrant's Current Report of Form 8-K filed with the Securities and
Exchange Commission in November 1996).
10(p) $100,000 Promissory Note, dated as of October 28, 1996, from First Medical
Corporation to Salvatore J. Zizza (incorporated by reference to Exhibit 99.8 to
the Registrant's Current Report of Form 8-K filed with the Securities and
Exchange Commission in November 1996).
11 Computation of earnings per share
12
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
*23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
*27 Financial data schedule
- - - - - - - - - - - - - - -
o Filed herewith.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ACQUISITION CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND CHARGES END OF
DECEMBER 31, DESCRIPTION OF YEAR LEHIGH EXPENSES AND (DED'S) YEAR
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Allowance for doubtful accounts $ 50 403 8 570 $1,015
Inventory obsolescence reserve $ -- 175 -- 93 $ 268
1996 Allowance for doubtful accounts $ -- -- -- 50 $ 50
Inventory obsolescence reserve $ -- -- -- -- $ -
</TABLE>
EXHIBIT 21
Subsidiaries of Registrant
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
First Medical Corporation Delaware
Midwest Managed Care Inc. Illinois
FMC Healthcare Services, Inc. Delaware
First Medical Corporation - Texas Division Texas
SPI Managed Care of Hillsborough, Inc. Florida
SPI Managed Care of Broward, Inc. Florida
SPI Managed Care, Inc. Florida
Broward Managed Care, Inc. Florida
HOC of Miami, Inc. Florida
Dominion Healthnet, Inc. Florida
NICO Inc. Delaware
HallMark Electrical Supplies Corp. New York
Universal Export Supply Corp. New York
American Medical Centers Managed Co., Ltd. British Virgin Island
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-K FOR THE PERIOD ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,151
<SECURITIES> 0
<RECEIVABLES> 18,729
<ALLOWANCES> 1,015
<INVENTORY> 1,964
<CURRENT-ASSETS> 21,096
<PP&E> 1,978
<DEPRECIATION> 1,245
<TOTAL-ASSETS> 26,045
<CURRENT-LIABILITIES> 22,506
<BONDS> 390
0
0
<COMMON> 9
<OTHER-SE> (2,554)
<TOTAL-LIABILITY-AND-EQUITY> 26,045
<SALES> 8,392
<TOTAL-REVENUES> 79,475
<CGS> 5,926
<TOTAL-COSTS> 71,438
<OTHER-EXPENSES> 12,043
<LOSS-PROVISION> 329
<INTEREST-EXPENSE> 576
<INCOME-PRETAX> (4,006)
<INCOME-TAX> (63)
<INCOME-CONTINUING> (4,006)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,560)
<CHANGES> (991)
<NET-INCOME> (10,970)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
